If you know what a credit score is, you’ll know that most banks and financial institutions often use it to measure a person’s likelihood of repaying the debt when they apply for credit. Your credit score provides an instant picture of your creditworthiness to lenders. Although some people with poor credit scores can still qualify for loans, the application procedure may not be as simple. If you find yourself in a similar situation, there are strategies you may apply to raise your credit score.
Building a solid credit history doesn’t necessarily have to take a lot of time and effort. A good score can be an essential factor that makes borrowing money simple. But before jumping into anything, let’s first understand what a good credit score means.
What is a Good Credit Score?
No score guarantees better loan terms or rates because everyone’s credit situation differs. With that said, it’s widely accepted that a credit score ranges from 300-850. Scores of 740 and higher are regarded as very good. A credit score of around 670 to 739 is generally considered good. While those between 580 to 669 are thought to be in the fair category. A score under 580 is considered to be a bad credit score . If your goal is to raise your credit score, knowing what influences your credit scores and how your financial behavior may help or hinder them is crucial.
What Factors Affect Your Credit Scores?
Even though different credit-scoring models may give varying levels of importance to each piece of information on your credit report, the common factors that affect any credit score are in the following five categories:
Payment history:
One of the vital credit scoring factors is your payment history. Your credit ratings can improve by making timely payments on your accounts. However, failing to make payments, having an unpaid debt sent to a collection agency, or declaring bankruptcy could lower your credit score.
Credit usage:
The amount of credit you have compared with how much credit a lender has extended you are easy to determine in the case of installment loans like personal loans. On the other hand, your credit utilization ratio gives a percentage value of the total outstanding balances and your total credit limit on all your revolving accounts, like credit cards and lines of credit. A lower utilization rate is considered better for your credit scores.
Credit Length:
You need some credit history to get a credit score, making this an important factor affecting your credit score. It includes the age of your oldest and newest accounts, the average age of all your credit accounts, and whether you’ve used a credit account recently. It’s wise to consider the impact of the length of credit history on your credit scores before opening or closing a credit account.
Credit Mix:
Your scores might improve if you demonstrate that you can responsibly manage different types of credit, like revolving credit and installment credit. You shouldn’t get a loan and pay interest only to add it to your credit mix because it has little influence on your credit score. However, if all your borrowing has been through installment loans only, you might wish to apply for a credit card and use it to make small manageable payments each month.
Recent Credit:
When you apply for a new line of credit, creditors can check your credit reports. This can result in a credit inquiry, which can appear on your credit reports for up to two years. Your credit scores are unaffected by soft queries, such as those that result from checking your scores and some prequalification for loans or credit cards. However, hard inquiries, which occur when a creditor examines your credit before making a lending decision, can shift your score from a good credit score range to a poor or fair one.
What to Expect with Your Credit Score Range
There are numerous credit-scoring models, each generating credit scores based on the data on your credit report using a unique formula. FICO® (Fair Isaac Corporation) and VantageScore® are the two most well-known credit-scoring companies in the United States. With a few differences, FICO® and VantageScore® currently range from 300 to 850.
There are general score ranges within this scale that most creditors use to make lending decisions. You can use these ranges to understand your current situation and set financial goals. Here are some of the credit score ranges:
Poor to fair scores:
You might have trouble being approved for numerous credit cards or loans if your score is poor to fair. To establish or repair your credit, you might need to start with a secured credit card or credit-builder loan.
Fair to good scores:
If you have a fair to good credit score, you might have more credit options, but you might not receive the best rates or terms. Although you don’t have the highest or the lowest risk to lenders, there is still potential for you to raise your credit score and improve your financial situation.
Very good or excellent scores:
If you have a very good or excellent score, you are more likely to get a loan with low-interest rates and reasonable repayment terms. While creditors consider other aspects when determining your eligibility, your credit score will probably not be a barrier.
What is a Good FICO® Score?
FICO® Scores are developed by the Fair Isaac Corporation, which claims that over 90% of the top lenders utilize only FICO® Scores when making lending decisions. This credit scoring model uses customer information from TransUnion, Equifax, and Experian, the three major credit reporting agencies.
As shown in the above image, a good FICO® score is between 670 and 739. Scores between 580 and 669 are considered fair, while those between 740 and 799 are deemed “very good.” A score of 800 or higher is said to be “excellent.” And lastly, a “poor” score falls between 300 and 579.
What is a Good VantageScore®?
Equifax, TransUnion, and Experian, the same three credit rating companies FICO® uses to create its ratings, founded VantageScore® in 2006. They aimed to compete with the more well-known FICO® scores. FICO® and VantageScore® consider making payments on time crucial for customers to improve their credit scores.
The ranges of the first two VantageScore® credit scoring models were 501 and 990. The 300 to 850 scoring range is used by the two most recent VantageScore® credit scores (VantageScore® 3.0 and 4.0). The current VantageScore® model classifies 661 to 780 as its good credit score range.
Why is It Important to Have a Good Credit Score?
Achieving your financial and personal goals can become more straightforward with a good credit score. It may significantly impact the amount you can borrow and the interest or fees you’ll have to pay on approval. Credit ratings can also influence non-lending decisions, including a landlord’s decision to let you rent an apartment. Some employers could check your credit records before hiring or promoting. Additionally, insurance firms may utilize credit-based insurance scores in most states to decide your life, home, and vehicle insurance premiums.
How to Get Good Credit?
Establishing and maintaining a good credit history is not overly challenging. Here’s a list of easy financial habits and behaviors you can follow to build a good score:
- Since your payment history is considered to have the most significant effect on your score, you should always pay bills on time.
- According to experts, keeping your credit limit below 30% or even less is better.
- You should avoid applying for multiple credit applications in short intervals, lowering your score.
- Check your credit scores and reports monthly to avoid incorrect or old information.
- Having a long history of managing credit cards and loans, especially one filled with payments made on time, will help you build excellent credit.
How Long Does It Take to Build Good Credit?
First, you should remember that building good credit won’t happen overnight. Secondly, it greatly depends on where you’re at in the scoring range and what financial difficulties you’re facing. If you’re a young adult and have just entered the world of credit, you can begin to build credit by adding accounts to your credit reports. You won’t have a credit score if you have newly created credit accounts on your credit reports until you’ve had them for a while. After at least one account has been open and on file for six months, you might be able to see a FICO® Score develop. However, a VantageScore® will create considerably more quickly. You can get a VantageScore® if your credit score comprises at least one account.
It could take years for negative records on your credit reports, such as missed or late payments or bankruptcy, to disappear and stop impacting your scores. Even though it will be years before those negative markings disappear, you can still notice a significant improvement. Remember, the main idea is to consistently focus on improving your credit and realize that the process takes time.
What is the Benefit of Having a Good Credit Score?
- Improve your chances of loan and credit card approval
- Get lower interest rates and terms from the lenders
- Makes leasing an apartment or buying a home easier
- Save money on your auto and homeowner’s insurance
- Get approved for higher credit limits
What is a Good Credit Score for Lenders?
Higher scores create more lender confidence that you will repay your debt as agreed. But lenders can set their definitions for what they consider good or bad credit scores when evaluating you for credit cards and loans. Some lenders build their custom credit-scoring models, but the two most common ones are those developed by FICO® and VantageScore®.
Conclusion
A good credit score is the one that can help you get what you need, whether it’s quicker access to new loans, getting a new job, or reducing mortgage rates. At the same time, good credit is also subjective to the lender you choose.
You should make a point to check your credit score before applying for a new loan or credit card. Doing this will help you understand your prospects of obtaining favorable terms. In addition, checking your credit score earlier provides you the chance to raise it and perhaps avoid paying hundreds or even thousands of dollars in interest.
Monitoring your score can help you take steps to raise it, increasing your chances of being approved for a loan, credit card, apartment lease, or insurance policy while also strengthening your financial situation.
Frequently Asked Questions
What Is a Payday Loan?
Payday loans are the most common type. These short-term loans are taken out against future pay. These loans often have higher interest rate than personal loans.
The borrower must repay money within 2 weeks of receiving the next paycheck. He could lose all or part the amount borrowed if he fails to pay.
Payday lenders often charge high fees for these short-term loans. They also tend to target people who already face financial difficulties. This makes them an easy way for borrowers to fall into debt.
Does Speedy Cash Check your credit?
Many lenders will require credit checks in order to protect you from being scammed or for people who may not be eligible for financing. But will they increase your chances to get approved for a mortgage?
The short answer? There is evidence that consumer reports helped millions of Americans get home loans by avoiding predatory lending practices.
Consumers should be aware, however, that these reports can be costly, which could discourage borrowers from applying to financial services.
Credit scores are also affected by other factors besides a lender checking your report. If you are late on your payments or miss several months, your credit score may drop. This is because missed payments are a sign of poor credit history.
It’s important that you note that not every lender will look at your credit history before approving a loan application. Some lenders only examine your credit report once or twice during an application process. Others won’t.
You should ensure that you are fully aware of the information that is being shared about you before signing up for any type or loan. Do you want to share private details about your finances with anyone else?
What is an “emergency loan”?
An emergency loan can be used to pay for unexpected financial emergencies. It can be used to cover unexpected expenses or until you are able to repay your debt.
A loan for an emergency may be available to help pay unexpected bills and other expenses.
You may need an emergency loan if you have been unemployed recently or lost your job due to a layoff. If your car suddenly breaks down, you may also require an emergency loan.
To get an emergency loan, you don’t need to wait. To get the best terms, it is important to apply immediately after an emergency.
Remember, you should not take out an emergency loan unless your situation is dire. If you don’t, you’ll end up paying higher interest rates than usual.
If you are in dire financial straits and don’t know what to do, borrow as little money as possible. Try to get a loan for just $100-$200 instead of thousands of dollars.
This will enable you to repay your debts quicker without having to pay additional fees.
Statistics
- For example, CashUSA’s payday loan APRs range from 5.99% to 35.99%, placing them well within the averages for most major lines of credit, including credit cards and bank loans. (timesunion.com)
- If you’re preparing your bank account for the charges that WeLoans will cost to find a lender, put that thought aside because it’s 100% free. (abcactionnews.com)
- Cons Up to 8% origination fee (abcactionnews.com)
- The loans usually can be rolled over for additional finance charges, and many borrowers—as high as 80% of them—end up as repeat customers.89 (investopedia.com)
- A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. (consumerfinance.gov)
External Links
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How To
Types of emergency loans for bad credit
Many emergency loans for bad credit are available today, so you should choose which one works best for your specific situation. We will be discussing the most popular emergency loans for people with poor credit.
- Private Money Loans (PML) from a Private Money Liender. A PML loan is a short-term loan from a private lender. They offer flexible repayment options and lend money at competitive rates. Their main problem is that they can only lend PS25,000 per person.
- Merchant Cash Advance Loan. A merchant cash advance loan is a type of business loan that allows a business to borrow money for future sales from its website or stores. The advantage of merchant cash advances is that they are longer-term than private lenders, and don’t require collateral. However if there isn’t enough profit, repayments must still be made immediately.
- Payday Loan. Payday lending companies provide small amounts of money for a short period. Repayment is usually due after your next payday, although these days, most payday lending providers allow borrowers to roll over their loans several times. Repayments are charged high-interest rates, ranging from 400% to over 1,000%.
- Personal Loan Personal loans are similar to payday loan but are offered by larger institutions. Personal loans are typically offered by larger institutions with higher interest rates, less stringent eligibility requirements, and lower minimum payments.
- Bank Guarantee Loan. Bank Guarantee Loan. A bank guarantees loans so that you won’t have to worry about not being able to repay the loan. You may need to prove that you work, live, and own real estate in your area, but once this has been done, you can apply for a bank guarantee loan.
- Car Title Loan. Car title loans allow you to borrow money from the owner of your car’s vehicle. The process is very simple. You hand over the keys to the vehicle, sign paperwork, then wait for approval by the lender. Once you have been approved, they keep your title as security.
- Personal Lines Insurance Policy Policy Loan. When applying for a personal lines insurance policy loan, you can use life insurance you have as collateral. Your insurer will issue a new policy with another beneficiary. Your existing beneficiaries will receive less money. A personal lines loan is only available if you can show proof that your income is sufficient.
- Small Business Administration Loan (SBA). SBA Loans are available for individuals, families, businesses and non-profit organizations. SBA loans can only be obtained if you meet the financial requirements and prove you are able to repay the loan.
- Home Equity Line of Credit This is the process of taking out a home equity credit line. It allows homeowners over 18 years old who live on their property full-time or those under 25 years old who intend to live there within six months to quickly access a large amount of money.
- Commercial Real Estate Mortgage (CREM). Commercial real estate mortgages can be used to finance commercial properties, such as shopping centers or office buildings. CREMs can also contain tax liens that help banks and creditors recover delinquent taxpayers’ debts.
