Understanding the importance of having a good credit score

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Understanding the importance of having a good credit score
2 years ago
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When you are trying to take out a loan, the only thing that hurts your prospects and costs for a loan more than having a low credit score is having no credit history at all. Ideally, of course, you want to have a high credit score. This will not only make it easy to get a loan, but will allow you to get a loan at the best possible terms.

Your credit score basically records how able and responsible you are when handling debt. In turn, the lender determines whether you have shown a pattern of responsibility that makes you likely to repay the loan and how much of a risk you present. Your credit history shows most loans and debt you have taken on within the last several years. It shows how reliable you have been at making your agreed upon payments. The greater the risk your past debt management behaviors represent, the more expensive the loan will be.

Credit scores are compiled by credit reporting agencies, but many lenders have their own credit scoring methods. In general, a credit score of 550 or below is bad, around 625 or so is mediocre, around 700 is above average, and around 775 is good. But, your score and the value of your score will vary by lender and scoring method.

Factors Impacting Credit Worthiness Beyond Your Credit Score

There are a couple factors beyond credit score that lenders consider when approving loans and deciding on terms. In some cases these factors will overcome a mediocre credit score.

Some people mistakenly believe that having a good job is an entitlement for a good loan. A good job that you've held for years may improve the terms of loans you're offered or may overcome a mediocre credit score, but few lenders will give out loans to those with good jobs and really bad credit scores. Those lenders that do make approve these loans do so at terms that will ensure their profitability is high. This means the costs of the loan for the borrower will be high. Meanwhile, someone with a modest income and a good credit score will qualify for very good loan terms.

Your educational background and experience are given some degree of consideration when you apply for a business or investment loan, but they get a lot less credence than the overall quality of your business plan and your current financial situation. Yet again, all of these factors combined get less consideration than your credit score in most cases. But, they may help improve the terms you get or nudge the decision in your favor.

Non-Factors in Credit Scores

In the United States, lenders are specifically prohibited from taking into consideration certain aspects of who you are that are protected freedoms. Your race, age, marital status, and religion are not to impact your eligibility for a loan and the terms of a loan. This information cannot be stored in your credit report. For more complete information on the topic, you can look up the Equal Credit Opportunity Act.

by Sarah
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