What is a Credit Score? Basics of Credit and Why It’s Important

Lenders use credit scores to evaluate the likelihood that a borrower will repay their loan. A higher credit score means you have a good track record of credit history and are attractive to lenders who may want to issue you a loan.

Your credit score comes into play when applying for any type of loan from a bank, private lender, or family friend. Lenders use a range of credit scores to categorize their borrowers and offer them different terms based on the strength of their credit profile.

Still want to learn more about credit scores and why they’re important? This article dives deeper into the basics of credit scores and how they work.

What is a good credit score?

Credit scores range from 300 to 850, so lenders have generally agreed upon guidelines for the range of good and bad scores. The best interest rates and repayment terms are reserved for borrowers with credit scores above 800. Those with very good credit have scores in the 740 to 799 range, while average credit scores fall in the range of 670 to 739. Any scores from 580 to 669 are considered fair and poor credit is from 300 to 579. 

While credit scores are important, they aren’t the only deciding factor lenders look at before issuing a loan. Lenders also look at your current debt obligations, monthly income, and credit history.

What contributes to your credit score?

You may be surprised to hear that several factors go into the number you see as your credit score. The most important factor that the credit bureaus look at when determining your credit score is your payment history. This shows lenders whether or not you have a history of missed payments on your record. A history of delinquent behavior isn’t a good sign for a lender who is considering issuing you a loan.

Lenders also look at the amount of your total outstanding debt. Student loans, mortgages, and credit card debt show up on your credit report and contribute to your score by about 30 percent. A high amount of outstanding debt makes you a riskier borrower to issue a loan to.

Lenders also look at your credit mix when determining your credit score. Creditors want to see a mix of debt obligations consistently paid on time. Having a mortgage on a home and regularly paying it off is a great way to create a favorable credit mix.

Lastly, lenders also look at the amount of new credit you’ve taken out recently. If you’ve just applied for several credit cards and bought several homes in a short time, creditors will see it as a red flag and a high risk of lending to you.

Final Thoughts

It’s important to know what a credit score is and how you can build credit to get better terms on loans and other debt. A good credit score can be the difference between getting approved for a home or car and getting denied. Be sure to research other ways you can improve your credit score before you decide to apply for your next loan.
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Thu, 29 Sep 2022 17:43:48 +0000

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