Why a Bad Credit Score Matters
A bad credit score can stand in your way of getting a credit card, mortgage, car loan, or other form of borrowing. It is one of the most widely used tools by financial institutions for evaluating the creditworthiness of potential borrowers. It can also affect other areas of your life, including employment and insurance coverage.
Given the significance of credit scores, you need to have a solid understanding of what they measure, what makes a score good or bad, and how they can be monitored and modified.
What is a credit score and what does it include?
Your credit score is basically a numeric value assigned to your credit history that tells a bank how risky it is to loan you money. Scores usually range from 300 to 850, with better scores at the higher end of the spectrum. Higher scores show that an individual is less of a credit risk, and therefore a better candidate for the bank to trust with its loan.
Credit scores are based on several pieces of information from your credit profile:
- Payment history. Whether your past payments have been on time, late, or missed altogether.
The most heavily weighted categories are payment history and current debt. People with long histories of making timely payments and those who are further away from maxing out their credit limits tend to get the best credit scores.
Who uses credit scores?
Credit scores are used by banks and other financial institutions when deciding whether or not to offer you a loan or line of credit. If you have a high credit score, you are more likely to repay any money you are lent. This means you will be more likely to receive credit approval than someone with a lower score. Higher scores come with another plus: People holding the highest credit scores are usually offered the lowest interest rates on their credi. In other words, they get to borrow money more cheaply.
Applying for credit is
not the only instance that calls for an evaluation of your credit score. Before renting property, many landlords look at potential tenants’ credit scores to predict if whether they will make rental payments on time. Insurance companies often consider credit scores before offering policies as well. They believe people with poor credit are more likely to file insurance claims, so they will charge those policyholders higher rates. Employers have also been known to check a job candidate’s creditworthiness as a test of a person’s character.
What is a good/bad score and what does it mean?
The majority of credit scores fall between 600 and 750. Scores of 720 and above are generally considered excellent. while having a rating of at least 680 is viewed as very good. If you have a score of 680 or higher, you will likely be granted most loans or lines of credit you apply for. Lenders will usually offer you the good interest rates and repayment terms, as well.
Those with scores falling between 620 and 680 are also likely to get loan approval but may not get the best interest rates or loan terms. On the other end of the scale, individuals with scores below 620 may find it difficult to get approved for credit. Those with the poorest scores – 560 and below – may not be able to get loans at all.
However, a bad credit score doesn’t have to be a permanent obstacle to obtaining loans and credit cards. Spend 6 months of careful attention to reducing your debt and making timely payments, and you will likely see a noticeable positive effect on your scores. Still, credit scores are a long-term measure and will not change overnight.
How can you access your credit report?
Visit AnnualCreditReport.com for a free credit report, one from each agency (Equifax, Experian, TransUnion) every 12 months.
How can you access your credit score?
- Visit Credit Karma for a free daily TransUnion credit score based on your report from TransUnion
Credit scores are a very important part of your financial profile because they can have a direct impact on your life. A poor credit score has the power to prevent you from opening a credit card, buying a house, or even getting a job. Luckily, understanding the factors that go into determining your credit scores will give you a leg up toward maintaining a favorable rating.