Your credit score is a three-digit number that represents how well you've paid your creditors and attempts to predict how likely you are to default on loans. When you apply for credit, lenders will look at your credit score as a way to determine whether to offer you credit and, if so, what interest rate to charge. Your score is calculating using data collected by the credit bureaus.
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FICO credit scores range from 300 to 850. The higher your credit score, the more creditworthy of a borrower you appear to be to lender. According to Kiplinger, the median FICO credit score equals 723. According to the Fair Isaac Corporation, about 45 per cent of people have scores between 700 and 799, but only 13 per cent have scores in excess of 800.
According to Bankrate and Kiplinger, you must usually have a credit score of at least 760 to qualify for the best interest rates on loans. For mortgages, if you have a score of less than 600 (according to Bankrate) or 620 (according to Investopedia), your loan will be viewed as a subprime loan because your credit score is low. The minimum credit score that may be approved for a mortgage will be around 500.
The better the interest rate on your loan, the smaller your interest payments will be. This is particularly evident in larger loans, such as new car loans and mortgages. For example, on a £13,000, 60-month new car loan, having a credit score of 700 could save you more than £1,950 in interest over having a credit score of 640. On a £248,300 mortgage, a credit score of 690 could cost you more than £21,450 in extra interest over a 30-year mortgage than if you had a credit score of 780, according to the Fair Isaac Corporation.
Having a credit score helps lenders objectively evaluate you as a potential borrower. Your credit score only looks at how you've repaid your debts in the past rather than including where you live, how old you are, your race or ethnicity or other subjective criteria. Your credit score is also the same is you move around the country. For example, if you move from New York to San Diego, lenders will still pull the same credit score.
When you take out a loan, your credit score is not the only factor considered by the lenders. Most lenders also take into consideration your employment history, your income levels and your debt-to-income ratios before assigning an interest rate to your loan. For example, even though you have a credit score of 790, if you are trying to take out a loan that would require you to use 60 per cent if your income to repay it, lenders will charge a higher rate, or may deny the loan altogether.
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