We all know that credit score plays a significant part while qualifying for a loan. But what is a credit score and how is it calculated?
Credit score is a
- Three digit numerical figure
- Calculated from the credit report
- Kept by the credit rating bureaus
- Determines your creditworthiness
So, credit score is a major factor in determining whether a person qualifies for a loan or not, and if yes, on what terms and conditions. It determines how much credit to offer to a person and at what interest rates. If a person is having a good credit score, he will definitely get a loan on relatively softer terms as compared to a person who is having a somewhat bad score.
Your score is telling the lender about your repaying abilities. This score is not only used by banks but government agencies, insurance companies and other lending institutes take this score into account to determine your creditworthiness. Credit card offers also depend on your credit score.
What is the range of good credit score?
Credit score is determined by different credit rating bureaus but usually ranges from 300 to 850. Having 300 score is considered to be very poor while 750 and above score is considered to be excellent. So, higher score makes it easy for you to get a loan on good terms. Although having a score between 500 and 600 is acceptable but the interest rates offered will be high and credit limit will be less.
How is your credit score determined?
- Payment history
The most important factor in determining your credit score is your payment history. How much you borrowed in the past, did you return in time, what problems arose while paying back, how efficiently you managed to solve those problems, all determine your credit score. If your payment history is good, you are definitely going to achieve a good score.
- Amount currently owed
The next factor is the amount owed by you to other lenders. In contrast to the payment history, this factor determines what you currently owe to the lenders. How much and how many kinds of loans you have taken, is taken into consideration. The more you are in debt, the weaker your score will be.
- Credit history length
If you are having a long good credit history, it is automatically going to improve your credit score. Making payments on time help you maintain your credit score. On the other hand, if you are late in your payments, contain so many credit cards, are careless towards your borrowing habits, you are definitely going to face difficulty while applying for credit card offers and other kind of loans.
How can you improve your credit score?
- The major step you can take to boost your credit score is making your payments on time. Whenever you will be late, your credit score will be affected adversely.
- Borrow only when you need. Do not become an impulsive purchaser. These kinds of people always face difficulty because they spend without any need.