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What does your credit score mean?

A credit score is a number between 300-850 that depicts a consumer’s creditworthiness. The higher it is, the better a borrower looks to potential lenders, and is based is based on credit history. This includes number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner. Let’s see if we can untangle the question: what does your credit score mean?

What does your credit score mean? The model.

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions. While other credit scoring systems exist, the FICO score is by far the most commonly used. There are a number of ways to improve an individual’s score, including repaying loans on time and keeping debt low.

How Credit Scores Work

A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co signer for borrowers with a low credit score.

What does your credit score mean? Flip Side

Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in them paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for scores, the average FICO score range is often used.

  • Excellent: 800 to 850
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 300 to 579

Consequences

A person’s credit rating may also determine the size of an initial deposit required to obtain a smartphone, cable service or utilities, or to rent an apartment. And lenders frequently review borrowers scores, especially when deciding whether to change an interest rate or credit limit on a credit card.

What does your credit score mean? How It Is Calculated.

There are three major credit reporting agencies which report, update and store consumer credit history. While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating credit health.

  1. Payment history
  2. Total amount owed
  3. Length of credit history
  4. Types of credit
  5. New credit

Factors

Payment history counts for 35% of a credit score and shows whether a person pays their obligations on time. Total amount owed counts for 30% and takes into account the percentage of credit available to a person that is currently being used, which is known as credit utilization. Length of credit history counts for 15%, with longer credit histories being considered less risky, as there is more data to determine payment history.

Other Considerations

The type of credit used counts for 10% of a credit score and shows if a person has a mix of instalment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. New credit also counts for 10%, and it factors in how many new accounts a person has, how many new accounts they have applied for recently, which result in credit enquiries, and when the most recent account was opened.

So, now you know what your credit score means for you. If you are in need of a loan with us and have poor credit history make sure to get in touch with Moolr to find out your options.

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