Your credit influences every area of your life. A good credit score means lower rates for car loans, credit cards, mortgages, and a few types of insurance. Employers also use credit scores to make hiring and advancement decisions.
This chapter will help you understand what a credit score is and what a good or bad score means. Basically, a credit score is a number that shows your likelihood of repaying debts. This number helps creditors decide on whether to give you credit or not and even the terms of the credit.
For instance, your bank uses your score to see if you qualify for a mortgage and to decide on the rate; the higher the score the lower the interest rate. Credit bureaus calculate credit scores using their internal algorithms. These scores depend on your financial actions, both present and past. How you pay your debt, amount of debt you owe, and the period you have had credit are some of the factors considered.
Your credit score keeps on changing depending on your actions. Simply put, creditors sell your financial information to credit bureaus and the bureaus use the information to come up with your score. This score is like a “grade” of your financial responsibility. New creditors use the credit score to determine your likelihood of repayment. There are many types of credit scores but the one that really counts is the FICO Score. It ranges from 300 to 850.
PLUS, Score: it was developed by Experian. It ranges from 330 to 830.
TransRisk Score: TransUnion developed this score and it ranges from 100 to 900.
Equifax Score: it ranges from 280 to 850.
VantageScore: unlike the three models above, lenders use the VantageScore sometimes. It ranges from 300 to 850. The credit you want to obtain and the interest rate that you would prefer are the determining factors on whether your score is good or bad. For a small loan, multiple score ranges are good. Mortgage lenders, however, will require a score of at least 640.
Here are the general range points.
781 and above – excellent credit
661 to 780 – good credit
601 to 660 – fair credit
501 to 600 – poor credit
500 and below – bad credit
Landlords will require that you have a credit score of no less than 620. Otherwise, you will have to get a cosigner. Alternatively, you might be forced to pay a huge deposit.
Average new car rate:
740+ (Super Prime): 2.70%
680 to 739 (Prime): 3.67%
620 to 679 (Non-Prime): 5.49%
550 to 619 (Subprime): 9.25%
<550 (Deep Subprime): 12.42%
Most lenders will not finance you if your score is less than 640. For the best mortgage rates, aim for a score of 720 or higher. For the best rates and a lot of perks, aim for excellent credit (720 and above). A score of 640 and above can also get you a decent credit card.