A FICO score is a credit score that lenders use in assessing the credit risk of any individual to repay a loan. FICO scores are from 300 to 850; the higher the score, the lower the credit risk assessment. But what defines a good FICO score? Below is a summary of various categories of credit scores and their implications.
More than 800 Credit Score It is interesting to note that respectable FICO scores are those of 800 or above. It guarantees the most appealing loan terms and interest rates and ranks you among the best borrowers. Given your very low credit risk level, the lenders will see you as fit for any kind of credit. A small portion of the population gets what is known as FICO scores above 800.
740–799 Credit Rating FICO still grades a score between 740 and 799 as very good to exceptional. Those with such scores will be qualified for lower lender interest rates. From low-interest auto loans and mortgages to the finest rewards credit cards, your range of credit options will be complete. This score range indicates to the lenders that you are a responsible borrower able to pay back the credit as agreed and control credit balances.
Between 670 and 739 Credit Score Between 670 to 739 the FICO score falls under favorable credit area. Although they may not be the lowest in the market, consumers in this category are said to have modest credit risks and can usually get decent interest rates on loans. If you have a decent credit score, you can be sure that you will be approved for most of the credit products you apply for—just a step below exceptional. Still, you are usually fine in terms of debt load control—a few points below the next level.
580-669 Credit Score Credit scores ranging between 580 and 669 are considered to be fair. If the score levels off to this range, then a credit rating is average. They will be able to provide standard loans and credit cards, which are typically offered with normal or higher-than-normal interest rates. You are not a poor credit risk, but you are not getting perfect rates either, so it is worth boosting your score. If you make efforts to develop good habits of credit, your fair score can quickly shift to the good score category.
Below 580 Credit Score Having a FICO score below 580 is classified as having a poor or bad credit status. This tells the lenders that you are a higher credit risk than the consumers in the good to excellent credit rating bracket. Lenders offer credit to those with good ratings and it will be difficult to secure a competitive credit with such a score. You may not qualify for conventional loans and credit cards at decent interest rates. Few choices may be forced to use predatory lending like subprime auto loans or to use secured credit cards to begin the process of credit rebuilding.
What Affects Credit Scores? Now that you understand the various categories of good and bad credit scores, what comprises the numeral figure? FICO scoring models take into account five main categories of your credit report to calculate your credit score: FICO scoring models take into account five main categories of your credit report to calculate your credit score:
Payment History Payment history accounts for 35% of the FICO score, given your record of timely bill payments. This entails all credit cards, retail accounts, student loans, and mortgages among others that are reported on your credit report. Paying accounts as per the due date is the best strategy. It is also important to understand that any kind of payment that is made after the due date hurts the credit score.
Credit Utilization The second highest driver of your score is your amount of available revolving credit as compared to your actual use of such credits. If you have reached or exceeded a certain threshold of your credit limits which is 30%, your FICO rating may begin to decline.
Credit Age/Length of History constitutes 15% of your total credit score, the longer one’s credit history, the better it is. In general, your score increases when you establish a good credit history with accounts such as credit cards, auto loans, or mortgages. It is beneficial to have diverse accounts, with the newer ones combined with the accounts with a long experience in doing business with your company.
Credit Mix This means that in addition to credit cards, the lender would prefer to see other types of credit accounts such as retail accounts, installment loans, and perhaps a mortgage debt rather than seeing a list of credit cards. Diversity is worth 10 % of your total score.
New Credit When one opens several credit accounts within a short period, your score will have a downward trend in the short run. Only in the last 12 months too many credit inquiries and newly opened accounts will negatively affect your score because they suggest higher risk. Applying for huge loans in a short period will not reduce your credit score.
How Frequently FICO Scores Are Updated Credit report data changes monthly depending on the payment history, credit claims, credit card balances, and other activities. If this information changes with a new activity, so does your FICO score As established above, the FICO score is arrived at after analyzing several variables. It can be slightly higher or lower or more so depending on your credit position profile.
FICO also from time to time adjusts the parameters of its scoring model, which can also lead to changes in your score even if you have not applied for new credit. This is why checking your score quarterly or annually is recommended to monitor shifts that may have occurred.
Improving Your Credit Score The two main ways to increase your credit score are The two main ways to increase your credit score are:
Always pay all credit accounts on time Maintain total utilization of all credit cards as low as possible about credit limits
Beyond that foundation, other smart financial habits can also help build your score like Beyond that foundation, other smart financial habits can also help build your score like:
Reducing large balances on credit cards Limiting new credit applications Maintaining old credit accounts Examining accounts for mistakes or embezzlement Saving up for rainy days instead of relying on credit.
The implication is that the higher your credit score, the higher your chances of getting cheaper interest-rate loans that cost less in the long run. However, getting the best score of 850 is not mandatory as long as you get a score over 700 in general. A high FICO score is indicative of proper credit management hence making lenders take you as a worthy client.
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