Step 4. What Does Your Credit Score Mean?
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Each credit scoring agency uses slightly different formulas for arriving at your credit score, but all three use a score ranging in value from 350 – 850, which can change monthly based on your credit activity.
You’ve probably heard the terms “good credit,” “average credit,” and of course the dreaded label “bad credit.” The average credit score in the U.S. is around 675.
Although there aren’t any hard and fast rules, here’s how lenders generally look at your scores:
- A credit score of 720 or more means you have excellent credit, and should have little trouble qualifying for loans and other credit-related products.
- A credit score between 680-719 means you have good credit and probably won’t have too many loan or credit-qualifying issues, but may not qualify for the best available interest rates.
- A credit score between 620-679 will prompt most lenders to take a closer look at how you’ve handled your past credit use and your overall financial health. But you may still have a pretty good chance of qualifying for
the credit you want.
- Scores between 570-619 are considered higher risk, and will immediately take you out of the running for some types of loans.
- Any credit score below 570 will seriously limit your ability to access loans and credit.
Not only does your credit score effect your ability to get credit and loans, it also can impact the interest rates you pay.
Why Do You Pay More Interest When Your Credit Score Goes Down?
For lenders, the name of the game is risk. If it’s riskier for a company to lend you money based on your credit history, they’re going to charge you a higher interest rate to offset the higher risk—or be less likely to give you any credit to begin with.
For example, if the colonist we mentioned at the beginning of this course borrows a bushel of seed from his fellow colonist, but only pays back half of what he owes, the lender wouldn’t have as much incentive to give the farmer more credit—but he might be more inclined to take the risk for a bigger interest pay-off.