What Are Credit Scores, and Why Are They So Important?

What is a credit score?

A credit score is a number that ranges from 300 to 850, it calculates how capable you are to repay the loan that you might borrow from your finance company. Just for fun, let’s use a house as an example. You might want to buy a home and take a loan out to finance the purchase of this asset. The loan provider will review your credit score to determine your qualification for the loan based on your personalized credit score. For reference, a fair credit score lies between 580 and 669. You will need to have a credit score of at least 620 if you are interested in the housing market. 

Why do you need to have a credit score? 

Lenders lend you money depending on your credit score. The higher your credit score is, the higher you get the chance to take out a loan from the bank for your expected purchases at the lowest rates. The main idea of credit score is to help people improve their lives and reach their goals. For example, if you want to invest in the land market, your FICO score must be above 620 to be acceptable for the lenders to rent you money. 

When do you use a credit score? 

A credit score is used when you want major purchases that you could not afford with just cash, like a home or a car. Your credit score is also required when you apply for a credit card, student loan, or personal loan. The chances to get lower rates for a credit or loan increases when your credit score is higher.

Who has a credit score?

If you are 18 or older, and have established any sort of credit line, you will have a credit score. You receive your credit score in your name after the 1st time your credit line is open, and keep the same association throughout your life.

Why are credit scores important?

Lenders will judge your honesty by looking at your credit score when you apply for a credit card or certain type of loan. Your credit score reflects your financial liability. Lenders may want to see how responsible you are by checking your repayment history; paying your dues and bills on time and how likely you are to delay the repayments of loans. It tells you about the member who will be lending you money and when you are expected to pay back the loan.

5  Benefits of good credit score

Credit scores are also beneficial for your financial health since they can unseal many savings despite your access to credit cards and home loans. FICO scores can make your life a lot easier if you manage

them well. You can enjoy a few favors like...

• Serious savings on a major purchase

• Reliable loan products

• Get the best credit cards

• Discounts on insurance

• Numeric housing options

5 Ways to boost your credit score

Paying your bills on time is a very important step in maintaining your credit score. Here are some regular tips on how you can have a nice FICO score;

• Give your credit reports a review

• 30% of credit usage is ideal

• Keep the old account open

• Avoid opening too many new credits

• Track your progress

-You can check your credit score through your bank or directly through the credit bureau

How can you earn a good credit score? 

Good credit scores are what you need when you want to invest in a deal, take loans and pay off your debts on time, leaving a nice impression on your score statement. Generally, a  score of 700+ is considered a good credit score.  There are several factories that are considered in a credit score, making way for a multitude of ways for you to increase your credit score and maintain it.

• Bill payments history

Pay your bills on time to gain a higher FICO score: For the real estate market, you surely want to present how honest and cooperative you are. Your previous bill payment before the due date explains your responsibility and how serious you are to repaying the organization.

• Credit usage

30-10% utilization of credit: In FICO score calculations, credit utilization is the second most important factor after payment history. The classic credit usage is 10% or less for a member with a good credit score. For example, do not spend more than $3,000 if your card has 10,000$ to keep your credit in balance.

• Credit line’s age

Length of your credit history: The chances to gain better scores are more when your first credit line is still successful. You do not have control over this one, however, a good goal for  your credit line is a continuous 6 to 10 years.

• Credit mix

Bonding of 2 loans: Credit scoring might also look at the blending of two types of loans. To aim for a healthy score, it’s better to mix and match the types of loan like mortgage, loan or credit card etc. It is considered in calculating good credit scores. A good credit mix includes both, revolving credit and installment loan. If you have an auto loan, two credit cards and a mortgage, then it is a bundle of benefits to keep your FICO score high!

• New credit lines open

Your foundations also observe the number of accounts you have open. It is better to have a backup credit line opened for multiple use rather than a line full of balance. In essence, you took a loan from the bank to buy a house and gave your home project a ‘go’... in the meantime you’ve had and need another loan for recovery. In such scenarios, your single credit line goes under debt twice, which is why having a spare but empty credit line is better.

Inquiries

When it comes time for an institution to review your information to see if you qualify, it actually can potentially affect your credit score. There are two types of credit inquiries referred to as a soft inquiry and hard inquiry.

Soft Inquiry: A soft inquiry does not affect your credit score. It typically involves you to check your own credits and employer permission to review your information and card history. It's just a second check to make sure that they will send you pre-approved offers on credits.

Hard Inquiry: Hard inquiries affect your credit score miserably for months or for a couple of years. It includes applications for new cards, auto loans, mortgage or other forms of new credits. If you are applying for new cards to raise your credit score, it’s a risk! Stop applying for new credits for a while.

Conclusion

We’ve learned that earning and maintaining a good credit score is important when it comes to loans, and getting assistance with purchases you want to make. There is so much that goes into a credit score, in both building it and maintaining a good one. If you don’t have a good credit score, or are not sure what yours is, it is never too late to find out.