Not many people know how credit score affects their attempt to build a financially stable future until they decide to take a loan to buy a home, a car or make any major purchase.
So, let’s take a look at what credit score is, what are its ranges and how it affects your financial future.
What is a credit score?
It’s a three-digit number that decides your creditworthiness. lenders and financial institutions use this number to determine your repayment capacity. Whether it a home loan, credit card, personal line of credit or personal loan, your credit score helps lenders determine whether you are eligible for a loan and if you are what interest rate needs to be charged to reduce the risk of default.
In a nutshell, your credit score is like a fingerprint that tells the lenders at a glance how financially responsible you are with your money and how much trust they can place in you.
The riskier you appear to the banks or the lenders, the less likely you will be to get a loan or credit. Even if your loan application is approved, you are more likely to pay a high-interest rate for the credit you get.
Understanding the Credit Score Ranges
The credit score ranges from 300 to 900. If you are closer to 900, lenders have more confidence in your ability to repay the loan. That means you have a better chance of getting your loan application approved at a better interest rate.
Know Your Credit Score
Excellent credit score- Between 750 and above
Good credit score- Between 700 and 749
Fair credit score- Between 650 and 699
Doubtful (risky) credit score- Between 600 and 649
Very poor (high risk) credit score- Below 600
What is a good credit score?
Anything above 750 is taken as a good credit score. If you have a score of 750 and above, banks and financial institutions consider you to be credit healthy. However, if your score is less than 750, banks may be apprehensive about giving you any sorts of loans; the credit risk gets higher and higher as your credit score goes lower and lower.
There are 3 big ways credit score affects your finances and your life in general, now and in future. Let’s dig this further:
#1: Your Credit Score Can Cost (or Save) You Money on Interest
When you decide to buy a home or purchase a car, you’ll need a strong credit history if you want to get the best interest rate and the best loan terms. Lenders and other financial agencies check your credit score to determine your reliability to repay the loan.
A low credit score is a red flag. Lenders immediately see it as a risk and even if they approve your loan, you are more likely to get it at a higher interest rate.
If you have no credit history, the lenders have no data to determine your repayment capability. In such a case, your loan may get approved, but you might get it at less-than-ideal loan terms and high-interest rate.
And if your credit score is good, you end up with fast loan approvals and low-interest rates.
Simply put, the better your credit score, the more money you’ll save on interest; the lower the credit score, the more money, you’ll spend on paying the interest on your loan.
#2: Your Credit Score Affects Your Refinancing Options
Even if you managed to get a loan such as a home loan or a student loan and down the line, you decide to refinance, your credit score will determine whether or not you get the best interest rate. A bad credit score can prevent you from qualifying for a refinance. However, a good credit score opens the door for the best refinancing options.
#3 Your Credit Score Affects Your Potential to Build Your Savings
If you have a low credit score it may be an indication that you have more debts and less income or you are spending more than you earn. That makes it difficult to meet your financial responsibility of paying your outstanding debts.
Not paying your debt on time puts you into more debt until it becomes a never-ending cycle. To make matters worse, the high interest rates on your debts hamper your capacity to save money for the future.
With such significant things at stake, it is essential to have a good credit score. If your credit score is already a red flag to most lenders, there is hope. The following tips will help you improve your credit score to secure a stable financial future.
- Get a copy of your credit report and ensure that your account details are accurately documented.
- If you notice any errors, however small, notify the credit bureau immediately.
- Limit the usage of your credit cards.
- Have a good credit portfolio comprising a good mix of credit products.
- Pay off your debts on time. Set up a reminder, if needed.
Your credit score makes a considerable contribution to your financial security. So, the best time to start boosting it is NOW. The earlier you start, the better will be your financial prospects of getting a loan at a low cost to you. It’s possible.
Planning to give your credit score a boost? You may want to take a personal loan to have a good mix of credit products. MoneyTap can get you a personal loan at competitive interest rates. Download MoneyTap.