A credit score ranges from 300 to 850, which assesses a consumer’s creditworthiness. The higher the score, the more appealing a borrower appears to potential lenders.
A credit score is calculated based on a person’s credit history, which includes the number of active accounts, total amounts owed, payment history, and other elements.
Lenders primarily use credit scores to determine how likely a borrower will pay back a loan on time. Here’s more of it!
A credit score ranges from 300 to 850 or higher. However, a perfect score of 850 and above is very unlikely to occur, and if it does, you likely won’t see it for long as credit reports are continuously being updated.
What is a Credit Score?
The purpose of a credit score is to assist lenders in choosing the right customers. Lenders and banks would like to know how likely a potential client is to default on their loans. A customer with good credit is less likely to skip a payment than one with bad credit, representing a more significant risk for the business.
Credit bureaus examine your borrowing history to determine your risk level and, consequently, your credit score. They also check to see if you have an account for making on-time payments.
Rather than having to dig through your entire financial and borrowing history, banks and lenders may now use your score to get a general notion of your trustworthiness.
How does a Credit Score Work?
Your credit score is a three-digit number typically ranges from 300 to 850 and is determined by several factors. You can take action to raise your credit score by being aware of the variables that influence it.
- Payment history: Your payment history comprises 35% of your credit score. This indicates your ability to pay your bills on time, how frequently you miss a payment, how many days past the deadline you pay your bills, and the frequency of late payments. Your lender will typically record payments that are more than 30 days overdue, which will harm your credit scores.
- How much you owe: The amount you owe on credit cards and loans accounts for 30% of the score. Creditors and lenders also consider how much of your credit line, or “credit limit,” is used. Lenders and creditors want to know that you can appropriately use credit and make on-time repayments. Your credit scores may be impacted if you have a variety of credit lines that are “maxed out” or at their limits.
- Length of credit history: The duration of your credit history determines 15% of your score. The longer you have made payments on time, the better your credit rating will be. Credit scoring models often look at the average age of your credit when they look at your credit history.
- Type of credit used: 10% of your score is determined by the types of accounts you have. Having various accounts, such as credit cards, installment loans, house loans, and retail loans, may help you raise your credit score.
- New credit: The remaining 10% is recent credit activity. Many current account openings or applications for new accounts could indicate that you will have trouble paying your bills, which would lower your credit score.
Are There More Credit Scores?
The 300–850 range is the most well-known range of credit scores. The prevailing consensus is that anything over 670 is good. FICO also provides industry-specific FICO scores, ranging from 250 to 900, for things like credit cards and auto loans.
Following are the standard FICO credit score ranges:
- Exceptional Credit: 800 to 850
- Very Good Credit: 740 to 799
- Good Credit: 670 to 739
- Fair Credit: 580 to 669
- Poor Credit: Under 580
Although it is technically possible to receive a perfect score of 850 or higher, statistically speaking, it is unlikely to occur. In reality, only 1% of consumers will ever receive an 850, and even then, they probably won’t see it for very long because credit bureaus are constantly updating FICO scores.
What is a Credit Score Important for?
Your credit score is among the most crucial factors that lenders will consider when you apply for a payday loan, mortgage, credit card, or mobile phone contract.
Therefore, having a good credit score is essential since lenders may turn you down for a loan if they believe you won’t be able to make payments due to a poor credit score.
Since they know the consequences of not making payments on time will be more severe; lenders will frequently raise the APR or rate of a loan if you have a negative credit score because they think you will be more likely to pay it back.
How Can I Know My Credit Score?
Once a year, you can ask for a free copy of your credit report from each of the three main credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com or calling 1-877-322-8228.
Additionally, if you’ve been turned down for credit, are receiving welfare benefits, are unemployed, or your credit report is inaccurate, you have a right to see it within 60 days.
Can I Get a Loan with Bad Credit?
Your credit score is not a requirement for all loans. Payday loan providers will offer loans to people of different credit histories, including those with bad credit histories, so bad credit does not have to be a barrier to acquiring money.
Apply online and get a response on your loan immediately to find out if you qualify for a loan from a payday lender.