Why Your Credit Score Is Important
Almost everyone has heard that Fico score is pivotal for living restrictions-free and using all life opportunities. But why is Fico score important, and how to keep it high?
Your rating shows other people whether they can rely on you. It may influence your chances of getting funds, renting an apartment, and even taking up the employment of your dream. Your credit score speaks louder than your words.
To have a good rating, you must have basic topic-related knowledge. Below you will find information about how a score is calculated and why it is essential to keep it high. The following tips will help you improve your score and install good spending habits. So, here we go!
Why Your Credit Score Matters
A score may be viewed as a measure that shows your well-being. You shouldn’t underestimate its importance. Indeed, it is essential to check your rating regularly and improve it if needed.
There are numerous reasons for taking care of your rating. People with high scores are perfect applicants for lenders. They can easily qualify for beneficial loan offers with lower rates.
But it is not the only reason to improve your rating. Your insurance, rent, employment, mortgage, and many other things depend exactly on your report. In such a way, your rating shows your creditworthiness.
To help you understand why we pay so much attention to the score, let’s consider some of the most essential reasons for it below.
How Loans Depend On Credit Score
The first thing you should check before applying for loans is your score. For most creditors, it is the most significant criterion for making approval decisions.
Borrowers with good scores can get approved for any loan type and receive money within one business day (if they deal with online lending platforms).
Well, you may say that there are companies that offer bad credit options, and you will be right. However, such options always have higher interest rates and additional fees. Consequently, you will spend more money on extra charges and pay higher monthly installments.
All in all, if you have a good or excellent rating, you can choose the most beneficial offer and lending company. You have a wide choice of loan types, including secured and unsecured ones, with various conditions and terms. Isn’t it a great bonus for people looking for cash assistance?
Good Credit Gives The Possibility To Live Comfortably
You may not know about it, but your score, in some way, defines the quality of your life. The thing is that most businesses look at your rating to understand who they are dealing with.
People with good scores feel more relaxed and secure. They know that most doors they knock at will be opened for them.
Did you know landlords and utility providers may also check the client’s score? They do it to ensure they deal with a person with a stable income.
As you see, your rating serves as your visit card. The higher it is, the greater opportunities in most life spheres you have.
Good Credit Score — Good Employment
Your spending habits may influence your earnings. Note that many employers include credit checks in the hiring procedure.
They may look through the report of the applicants to assess how responsible, reliable, and mature they are. And if you have a poor score, you are unlikely to have a good history. These things are interconnected.
Late cash deposits may show your lack of organization, self-discipline, and disability to follow the deadlines. Moreover, some people think applicants with bad scores are more prone to theft and fraud.
Well, it doesn’t mean that your rating is an essential criterion for all potential employers. Some of them don’t conduct score research at all. However, you must be ready for it and try to improve your rating before the interview (if it is possible).
How Credit Scores Work
A Fico score shows the consumer’s creditworthiness. It is based on the bank history and depends on many factors, including payment history and its length, types of loans, an individual’s utilization rate, etc.
As mentioned, potential lenders, employers, and even landlords may check the applicants’ reports to assess their well-being and individual traits. It is essential to understand that there are many scoring companies. Each of them uses different approaches to the calculation of customers’ ratings.
Consequently, your score may range depending on your chosen company.
Most lenders use FICO and VantageScore ratings to check the customer’s creditworthiness. Both range from 300 to 850, but they are not identical in points value. Look at the tables below to compare these rating models.
|Type Of Credit||Credit Score|
|Very poor credit||300 to 579|
|Fair credit||580 to 669|
|Good credit||670 to 739|
|Very good credit||740 to 799|
|Excellent credit||800 to 850|
|Type Of Credit||Credit Score|
|Very poor credit||300 to 550|
|Fair credit||550 to 650|
|Good credit||650 to 700|
|Very good credit||700 to 750|
|Excellent credit||750 to 850|
Both models pay attention to the same factors while calculating your rating. However, they assign different values to the items on your report. Among other things, FICO calculates your rating using 5 categories, while VantageScore applies 6.
Note that these models have different qualification requirements. To get FICO, you must have at least one account opened for 6 months. At the same time, for VantageScore, you must have one or more active accounts that have been opened for one month and an account reported to financial bureaus within the past two years.
How Credit Score Is Calculated
A Fico score is a complex rating that indicates your spending habits and shows your creditworthiness. It is based on the customers’ reports and includes many factors.
To increase your chances of getting loans, you must boost your rating. To manage it, you need to work out a strategy that is impossible without an understanding of key score components.
As mentioned, scoring companies apply different approaches to defining the customers’ ratings. However, they all pay attention to the factors we will mention below. These criteria weigh a lot and should be under your strict control.
This criterion is the most important in calculating your rating. Just keep in mind that if you choose FICO, your history will account for 35% of your rating. VantageScore doesn’t set percentage equivalents, but it marks this factor as extremely influential.
Payment history shows whether you are paying bills consistently and fulfilling your debt obligations on time. It means that all your activities (and inactivities) are recorded and kept.
If you miss a payday, you have 30 days to deal with it. After it, this information will be reported to consumer bureaus, and your rating will decrease. It is reported that your FICO rating may lose 180 points because of a violated payday.
To avoid such unpleasant situations, follow the paydays. You may set an autopay or push notifications not to miss the loan deadlines.
The second most influential factor for your rating is the utilization rate. This measure shows how much of the available limit you are currently using. It is calculated by dividing the sum of all your balances by the amount of your limits.
You may not know it, but for lending companies, your utilization rate serves as a sign of your creditworthiness and well-being. It shows whether you control your finances and spend them wisely.
The value of utilization rate with FICO accounts for 30%, with VantageScore somewhere near 20%.
The lower your utilization rate, the better. Most experts recommend keeping no more than 30% of the available balance.
Length Of Credit History
This factor is not as pivotal as the previous ones, but it accounts for 15% of your FICO rating and 20% of the VantageScore.
It means that the duration of your history in some way influences your score. The longer your history, the better. Why is it so? Long histories comprise a lot of information about the customers since they show their financial behavior during an extended period.
That’s why it is not recommended to close old accounts even if you no longer need them. What’s more, if you have negative notices in your history, keep in mind that, in most cases, they disappear after 7 years. Sometimes a good rating requires patience.
This measure shows the variety of loan products you are using. It means that people who have in their histories records about installments, car titles, cash advance loans, and the like may have higher ratings.
But don’t be afraid. If you use one type of loan, you won’t lose a lot. Credit mix accounts for 10% of your overall rating. If you follow the paydays and have a low utilization rate, you will have enough points to get approved for most services, even without using various loan products.
How To Build Good Credit
Since financial rating is important for living restrictions-free life, you should take care of it. You need to work out a well-thought strategy to increase your rating. Note that it is a time-consuming process, and be patient.
Follow the paydays
All lenders pay attention to your money habits. For them timely installments serve as a sign of your reliability and self-discipline. If you have multiple debts, consider a debt consolidation loan. It will help you manage your finances and don’t forget about deadlines.
Don’t rely on loans
Try to live within your means and apply for funds only in case of emergency. If you take a loan, make sure you can pay it back. Otherwise, you may decrease your rating considerably.
Keep your credit utilization low
It is the second most important factor for your score. That is why it is a good idea to use less than available.
Become an authorized user
This tip is extremely useful for people with short histories. By becoming an authorized user of someone else’s (or your old) account, you can add positive information to your report and boost your rating.
How to Maintain a Good Credit Score
If you have a good or even excellent rating, it is not difficult to keep it at the same level. All you need to do is to instill good habits. As you know, it is essential to make regular monthly installments and fulfill your loan obligations. It is the main key to success.
It is a good idea to form an emergency fund. It can prevent you from borrowing extra funds or increasing your card limit. In such a way it will be easier to keep your utilization rate low.
Another tip to keep your rating good is to track spendings. You can use mobile apps for monitoring your transactions and assessing them. Most applications offer analysis of the client’s behavior patterns which may be entirely beneficial.
Last but not least, don’t forget to check your report at least once a year. It will help you trace whether it doesn’t contain mistakes and check whether your strategy works. Many lending companies provide score information to customers for free so it won’t be a problem.
- What is the worst credit score?
It depends on the chosen scoring model. For example, FICO Score and VantageScore, which are the most popular, define 300 as the lowest possible rate. With such a score you won’t qualify for any lending services.
However, you shouldn’t worry. It is difficult to find a person with a score of 300. It is possible only if you systematically violate all existing loan obligations.
- Can a credit score be negative?
The minimum rating starts at 300. If you are actively using loan products, you can’t have a negative rating. However, if you don’t have a history at all, your score might be -1. It doesn’t mean that you are doing something wrong. It just shows that there is no information about your financial activity.
- Can a credit score be 0?
No, it varies from 300 to 850 so it can’t be zero. But as mentioned, you must meet some requirements to get a personal rating. To qualify for FICO you must have at least one account opened for 6 months.
At the same time, for VantageScore you must have one or more accounts that have been open for one month and an account reported to consumer bureaus within the past two years. A 0 score means you don’t meet these criteria.
- Is 650 good credit?
According to VantageScore 650 is a good rating, but FICO defines it as fair. Anyway, most lending companies set this score as a minimum one to qualify for a loan. It means that it is enough to get basic services, but be ready that the interest charges won’t be beneficial.
- Is it hard to build a good credit score?
This process requires a complex approach and a well-thought strategy. But it is not difficult to boost your rating. You just need to be patient and consistent. Start with repaying existing debts, following deadlines, using different loan offers, etc. If you don’t know how to build a good score, apply to a counselor.
- Does a poor rating have a negative impact on my life?
Yes, in some aspects a poor report may spoil your plans. With a low personal rating you won’t be able to apply for a loan or insurance, it will be difficult to rent an apartment, and even get a job. All these things may happen to you. But it doesn’t mean they will definitely happen. Some people live a full life without restrictions even with bad reports.