A credit score is an extremely important metric when it comes to determining whether you are a responsible credit user, or not. Whether you’re applying for a personal loan, or a mortgage or even an insurance plan, the first thing that the lender or the lending company will ask you is your credit score.
There are ways that you can improve your credit score, and there are important reasons why your credit score always needs to be of an excellent measure. Continue reading to know.
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A credit score is a number ranging from 300-850 that depicts how well and worthy a person is of a loan. The higher the credit score, the better your chances of scoring a bigger loan- and that too, very easily.
A credit score is based on various indicators: number of open accounts, total levels of debt, and repayment history, and other factors. Credit scores fluctuate with time; they are not a standard number that stay with you until the end of time. If you’re responsible for paying your dues on time, your credit score is likely to increase, and vice versa.
What is the highest Credit Score you can have?
Most credit scoring systems use a scale that ranges from 300 to 850. There are, however, some credit scoring models that go up to 900 or 950, including industry-specific scores used by certain institutions.
So the highest score that you can go up to is 850. However, it is not necessary for you to exhaust yourself into reaching that 850. Any score in late 700s to early 800s is great! You are good to go with proceeding with that loan!
This is the average breakdown to be mindful of:
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
What is the lowest Credit Score?
According to the FICO credit score range, the lowest credit score a person can have is 300. But luckily, most people don’t have a score as low as this.
But a score below 540 is considered bad credit, thus a lot of people are denied loans and credits based on this FICO score. Moreover, the average score that people have in the US is 704.
Is it possible to get a 850 Credit Score?
Where a perfect 850 FICO credit score may seem impossible and a myth, the truth is there are some people in the United States with a perfect 850 credit score. In fact, these people make up 1.2% of the American population! So the first myth is busted: having a perfect score of 850 IS possible.
If it is possible, is it necessary? Absolutely not.
You can have a decent credit score and an excellent reputation without hitting 850- in fact, a score that is 740+ is also a good fit. For insurance companies that are credit based, a good credit score can give you a reasonable premiums deal- meaning a better credit score will get you less monthly premiums to pay.
If you really want to get a perfect score of 850, here’s how you can do so:
The first step is utilization, if you’re someone who waits until the end of the month or when the statement closes to pay off your debt, you could unconsciously be affecting your credit score. A good way to lower utilization without changing your spending habits is to pay off your balance before the statement closes.
Moreover, if it is possible, make a budget sheet of all your expenses. You will be able to determine which of these you can easily cut back on and which ones aren’t too necessary- this way you will take less credit because you would have already cut your unnecessary expenses.
Your payment history is very important while determining the credit score, and the formula is simple: pay off all your credit before the due date. As long as you’re paying off the minimum amount on your credit, you’re set. Even if you miss one payment, you’re suddenly a notch down on your credit history.
The problem with having only one credit card is that missing one payment makes your credit score ‘poor’. For example, 23 on time payments/24 total payments = 96% (Very poor). This means that a mistake you made two years ago is going to impact you today if you have one card.
Never default. If you default on your credit lender, you could be in a major problem when trying to fix your credit score. A default reflects poorly on the worthiness of the credit borrower.
FICO uses percentages to indicate the importance of each factor to your credit scores.
|Length of credit history||15%|
Importance of a High Credit Score
There are a few motivations to pursue a high FICO rating, and every one of them include saving money:
Score lower rates on auto loans: Unless you have enough money to purchase a vehicle outright, you’ll probably need to get an automobile advance. Having a good credit score can help you secure a loan with the best possible terms. Customers with the most noteworthy credit scores meet all requirements for a normal loan cost of 4.2% on another car, contrasted and 14.97% for individuals with the least FICO ratings, as indicated by Experian information.
Get credit cards with great rewards: You can fit the bill for a credit card with pretty much any sort of credit. Yet, the best credit cards regarding prizes and advantages commonly expect great to outstanding credit scores.
Qualify for the lowest rate on a mortgage: Given the measure of cash included, your home loan is the credit you’ll need to get the least financing cost conceivable on. It merits placing in the additional work to search around and arrange, as even a little rate increment can cost you a huge number of dollars over the life of your mortgage. Preparing your credit for a home loan is a basic advance in the home buying cycle.
Negotiate lower interest rates on your credit cards: If you totally take care of your credit card balance every month, your credit APR is insignificant. Yut if you’re carrying a balance, having a great credit score could help your negotiations with your lender to lower your interest rate. Getting a lower interest rate could spare you a great deal of cash.
Improved insurance rates: If you’re looking for mortgage holders or accident coverage rates, having an incredible FICO rating may assist you with fitting the bill for a lower month to month premium- except in certain states where the practice is banned.
Refinance your loans to save money: If you’ve improved your FICO rating since you opened one of your credit accounts, you might have the option to renegotiate it at a lower rate and save cash.
What to do if you have a Bad Credit Score?
A subprime loan is a type of loan given out to people, especially borrowers with low credit. Many mortgage lenders reject people that have low credit ratings, because of their potential inability to repay the loan. This is also why the interest rate is relatively higher for such loans.
There is a prime interest rate that is set for prime buyers with a reasonable credit rating, currently the prime interest rate is 3.25%, but the subprime interest rate is always higher. This is due to the risk of the low-credit borrower to end up defaulting on the loan altogether.
Even if you’re not a high-risk borrower on your own fault, there are chances that you default on the subprime home equity loan because of higher interest rates. Here’s how you can avoid getting to that stage of default:
- Budget your income to include the potential loan payment.
- Check your credit score and fix errors in your credit history.
- Make timely payments each month to improve your credit rating.
- Shop around for alternative lenders.
- Consider asking someone with strong credit and income to cosign on the loan.
- Set a reminder at least 3-4 days prior to the due date so that you don’t forget paying, and if you’re short of money, you have time to ask from your friends or family.
Having an excellent credit score comes with all sorts of benefits and necessities; it won’t only help you with getting bigger loans on a low interest rate, but also credit score motivated transactions like insurance will be given to you on a low monthly premium rate.
The general credit score rating is 300-850, and the highest a person can get is 850 and the lowest is 300, of course. There are only a handful of people who have achieved a perfect credit score of 850, thus it is obvious that this score is achievable. But, you don’t need to work your way up to a perfect high score.
The reason is that a person with the credit score of 850 will receive the same benefits as a person with a credit score of 750, and there is not much difference that you’re saving anyway. If you have a low credit score today, you don’t need to worry- you can start working to improve the credit score by doing timely payments and making sure you don’t default on any of those.
Moreover, you can also try using a very less credit limit. People with the best credit scores have a habit of using less than 7% of their credit limit. Even a very small effort can help you in improving your credit score to a reasonable amount- and you can enjoy all the benefits too.