However, an increasing number of households have seen their credit scores fall in recent years. Low-income families are struggling to pay due expenses or manage their debt efficiently, and this is having a lasting effect on their credit reports.
But what is considered a good credit score? Many families are unaware of how good their credit score is and how to take advantage of it. In this article, we talk about what are credit scores, why they matter, what is considered a good credit score, and more.
What Are Credit Scores?
A credit score is a numerical value that represents the creditworthiness of an individual. It is compiled by analyzing a person’s credit history, like their past credit reports, monthly payments, and other financial data. Most lenders across the country rely on these numbers to determine which customers to lend money to and the interest rates they can obtain.
Credit scores were introduced in 1989 by FICO, an American data analytics company who saw the opportunity to offer a way for financial institutions to properly measure consumer credit risk. Since then, it has become the industry standard for consumer lending in the United States, with most large and small lending companies relying on its data.
Why Credit Scores Matter
Credit score are an important resource used by mani financial institutions to help them understand the behavior of potential customers. Before lending money, institutions have to determine how likely a customer is to pay the loan on time, among other factors. Credit scores are the best way to answer these questions.
Having a high credit score is important because it opens the door to loans with generous interest rates. Customers with good credit scores often save thousands of dollars on interest rates each year, and are given better terms whenever they need to refinance debt. In some cities, renting an apartment or obtaining an attractively-priced cell phone service plan requires a good credit score. Some cell phone providers also give customers with good scores access to special services such as smartphones with no upfront payment.
Credit scores play a key role when families want to grow financially. Acquiring a new home or car will be more affordable and easy to do for people with a high credit score. Credit scores are not static, instead being generated whenever a lender requests it. If a family doesn’t have a good enough score to obtain a mortgage loan with generous interest rates, they might be better off waiting several months until their financial history improves.
Credit scores are made with information contained in a credit report. In general, credit reports contain information such as total amount of debt, types of credit, number of credit cards, and more. They also include information on whether an individual has failed to pay their bills on time, previous defaults or bankruptcies, and other derogatory marks.
What Is A Good FICO Score?
Fair Isaac Corporation, better known as FICO, is a data analytics institution from California. Its most famous product is the FICO score, originally known only as credit score due to it being the first one used by financial institutions. A FICO score ranges from 300 to 850 points, with a five-level scale used to determine impact.
The lowest scale goes from 300 to 579 points. Users with a score within those numbers are often asked to pay extra fees or deposits, and most insurance companies will deny loan applications. Customers with scores between 580 and 669 are usually considered as subprime borrowers. They may have access to loans and credit accounts but with high interest rates. A good FICO score begins at 670.
People with a score above 670 are not likely to become delinquent and have access to most financial products without extra fees or conditions. Almost 38 percent of U.S. citizens have a very good (740-799) or exceptional (800-850) FICO score. These customers are offered the best interest rates and have access to all financial products.
What Is A Good VantageScore?
VantageScore is a consumer score created by three major credit bureaus, Equifax, Experian and TransUnion as an alternative to FICO. It was introduced to the market in 2006 and since then has become widely used by many financial institutions nationwide. It operates a score range similar to FICO’s, going from 300 to 850 points.
A VantageScore of at least 700 points is considered to be good. Customers with such a score are generally approved loans and credits with generous interest rates and flexible refinancing options. A VantageScore above 750 is considered to be excellent, giving customers access to financial products on the most favourable terms.
How to improve a credit score
There are several ways to improve a credit score. For example, families who start to pay their bills on time will see a significant improvement over time. Avoid delinquent payments and collection at all costs, even if it means taking a short-term payday loan. Most financial institutions put heavy weight on payment history, using it as a faithful predictor on whether a potential customer will honor loan payments in time.
Maintaining credit card balance as low as possible will also raise a consumer score over time. Although this approach may take some time, it is a reliable way to improve the credit utilization ratio, which is one of the main factors credit rating agencies use to calculate consumer scores. However, families should not close credit accounts even if they are paid completely, as it will have a negative effect on their total available credit.
A significant number of families are living in financial hardship. Having a good credit score is a beneficial tool on the road to economic stability. However, families should understand how much they can improve their credit score. Whether it is to apply for a mortgage loan or to refinance existing debt, credit scores should always be in the list of things to consider.