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Credit Score: Know the Basic Jargon to Spend Wisely

  • Expert Corner
  • Xavier Sabastian
  • 8 minutes

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Your credit score is a prediction of your ability to repay new debt. Credit scores of 690 or higher are considered excellent. 

Credit scores impact many elements of your life. These include whether or not you can acquire an auto loan and the interest rate you would pay. A higher credit score can open up more credit options with cheaper interest rates. Borrowers with scores of at least 750 often have a variety of alternatives. These include the potential to qualify for 0% car financing and credit cards with 0% initial interest rates.

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What is Credit Score?

A credit score is between 300 and 850. Banks, credit card companies, and other financial institutions use this score. They use it to determine if you can or will be able to pay off any obligations you accrue. A higher number demonstrates your willingness and ability to repay any loans. A higher number will help you get approved for new loans based on your current financial situation and previous conduct.

What Defines a Good Credit Score?

A good credit score is defined as a number between 670 and 850. The FICO Score is the credit scoring system you will hear about the most in the United States.  Your FICO Score will range from 300 to 850, with a higher score indicating stronger financial stability. 

Lenders may refer to your credit in terms of credit level of quality — such as bad, fair/average, good, or excellent — with each category relating to a different range of FICO Scores.

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Importance of Credit Score

Your credit score has an impact on whether or not you can get approved for a loan. The higher your FICO Score, the more likely you are to get approved for a credit card or loan. The interest rate associated with that loan or card will normally be lower as well. Conversely, lower scores might dramatically increase your loan rates or prevent you from receiving a product or service.

Credit Scores for Credit Cards

Many credit cards, particularly the most lucrative rewards cards, are only available to customers with a certain level of creditworthiness. Conversely, many of the most fantastic cards are only available to people with excellent credit. 

When it comes to cards, your credit score can influence the range of possibilities available. Credit cards come with variable interest and annual percentage rates (APRs). Therefore, the actual interest rate on your card will be inversely tied to your score, with lower interest rates being offered to those with higher creditworthiness and vice versa.

What Defines a Good Credit Score?

Credit Scores for Auto Loans

Lenders act similarly when it comes to auto loans. Your credit score determines whether a bank will grant a loan or require you to make further concessions to be approved. Additionally, it can, and usually does affect the interest rate you pay on your loan.

Credit Score jargon you should know

Payment history (35%), Debt Burden (30%), the Credit history (15%), Credit categories (10%), and Recent Credit Searches (10%) all contribute to your FICO Score.

Let’s examine how these elements work together to create your total credit profile:

Payment History

With 35% of your FICO Score, your payment history is the most important factor. Negative information in a person’s credit history indicates that they have trouble paying their debt obligations or have a dangerous mindset regarding credit. These factors indicate to the lender that they should proceed with caution when extending a further loan.

Late payments

Late payments are customers’ most prevalent issue with the payment history component. Being late on a monthly payment for your card or a loan will usually result in a negative adjustment to your score, whether it was because you were trying to make ends meet — or because you forgot —

Your credit score is affected by how late you pay your bills. The longer you wait, the harsher the consequences will be – this will show up on your credit record as of late payments in categories such as 30-days, 60-days, or even longer.

Missed or late payments on seemingly insignificant amounts can be as detrimental.

Credit Score Jargons you should know

Debt Burden

The specifics of your current debt burden, including how much you owe in total, what types of loans you have, and any other quantitative indicators regarding your entire debt and credit profile, account for 30% of your credit score. 

How much you owe and how it’s broken up among different lending products functions as a signal about your ability to handle your existing debt as an indicator of your creditworthiness.

Credit Utilization

Credit utilization (also known as your debt-to-limit ratio) is a calculation that compares the entire amount of debt on your credit card accounts to the total amount of credit available on those accounts. 

It’s better for your credit score if you have a lower utilization rate. This means your average balance is lower than the total amount you may have on your cards. This ratio can come into play if you’re considering canceling a credit card you already have. Even if you don’t use that card, as long as it doesn’t come with fees, the higher total credit limit makes your credit utilization stats look better.

This also indicates that asking for a greater limit on an existing card will lower your total ratio.

Credit history

The length of your credit history determines about 15% of your credit score. This considers the length of time that accounts under your name has been open, the average amount across all of your accounts, and the length of time your oldest open account has been open. 

The longer your accounts have been open and your credit history has been established, the more correctly a company can assess your finances and credit behavior. A few years’ worths of data about a customer is a stronger predictor of how they will act in the future than a few months’ worths of data.

Credit Types

The numerous types of debit or credit used, which account for 10% of your credit score, are one of the smaller components. 

Revolving credit (credit cards), mortgages, consumer finances, and installment loans are some types of accounts you may have. A history of having a bigger audience could be a good sign.

Why is it important to have a diverse credit history? 

A consumer’s prior exposure to various types of credit is a useful indicator that they are familiar with various financial products and can manage them correctly. Consumers may also have different attitudes toward paying off a credit card vs. a mortgage, so a lender may want to be extra cautious with someone with a smaller exposure.

Recent Credit Searches

Ten percent of your credit score is based on recent searches or hard queries into your profile. It’s important to remember that any hard inquiry into your credit history, such as a credit card application, lowers your credit score temporarily. However, this will not have a long-term impact.

It’s important to note that checking your credit score does not constitute a hard pull on your credit history. This will not lower your credit score. Checking your credit score regularly is a good idea to maintain your financial health. 

How to Improve your Credit Score

When information on a borrower’s report is updated, their credit score changes. Basically, new information might cause the numbers to climb or fall. 

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Here are some suggestions for improving a consumer’s credit score:

Pay your bills on time

It takes six months of on-time payments to see a significant difference in your credit score.

Increase your credit limit

 If you have credit card accounts, contact me to see if you can get your credit limit increased. If your account is in good standing, you should be given a credit limit increase. Not spending this amount is critical to keep your credit utilization rate low.

Stop don’t close

If you aren’t using a credit card, you should cease using it rather than closing the account. Closing an account, depending on its age and limit, can harm your score. In addition, closing one of the cards would increase your utilization rate, which would hurt you.

Work with a reputable repair agency

In exchange for a monthly charge, credit repair organizations will negotiate with your creditors and the three credit bureaus on your behalf if you don’t have time to improve your score. Furthermore, considering the variety of chances that a good credit score opens up, it may be worthwhile to use one of the top credit monitoring services to keep your information safe.

Work with a reputable repair agency

Bottomline

Your credit score has the potential to cost or save you a lot of money. You can get lower interest rates if you have a higher number. This means you will pay less for whatever line of credit you take. 

However, it is up to you, the borrower, to ensure that your credit remains healthy. If you have a healthy credit score you can have additional borrowing options.

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