Many of us are searching for good loan conditions, especially when we need to purchase something that we can’t pay for immediately. If you’re wondering whether banks and credit institutions do a background check on their applicants, the answer’s yes. And this can be a long process.
However, if you need money urgently, Payday Depot will be happy to help! You can also read ahead to find out more about credit scores and how they are essential!
How Can a Loan Be Useful?
Credit is a sum of money an individual borrows from a lender or bank. It comes with a specific contract agreement, payment deadline, and interest. For some, applying for credit or loans is their go-to solution when purchasing goods, products, or services. It’s easy, convenient, and doesn’t require you to pay right then and there.
But how do credit institutions and banks approve a person’s credit application? One of the processes includes evaluating the borrower’s credit score.
What is a Credit Score?
A credit score is a system that banks and credit institutions commonly use in evaluating applicants. It helps them to decide if a person’s credit application should be approved or not.
The credit score is your credit record where a lender can check your old and new loans, payment history, credit accounts, and other data to know your financial behavior.
How Does It Work?
FICO or Fair Isaac Corporation made the credit score model where they provided levels or scores for each. Credit scores by FICO range from 300 to 850. Getting a credit score of 700 is counted as “good,” and scores below 640 are considered “poor.”
It means that the higher your score is, the better, and you might get a lower interest rate. Here are the score ranges from FICO that credit institutions and banks use.
FICO Credit score range:
- 800 – 850 = Excellent
- 740 – 799 = Very Good
- 670 – 739 = Good
- 580 – 699 = Fair
- 300 – 579 = Poor
In the US, the three major credit reporting agencies: Experian, Equifax, and Transunion records, update reports and store the data. After collecting the data, they assess the factors with a relevant percentage according to their importance to the whole credit score.
- Payment history: 35%
- Total amount owed: 30%
- Length of Credit history: 15%
- Types of credit: 10%
- New credit: 10%.
How Can You Improve Your Credit Score?
Since credit score is essential to both lenders and borrowers, you need to know how to maintain or improve your indicators.
These are some of the ways you can look into.
- Always pay your credits on time. Avoiding penalties means you’re trustworthy and know your priorities.
- Slow down on using your credit card. For some, having many credit cards may seem reasonable as there are a lot of available resources. Still, it also affects the credit utilization rate, which compares the accounts’ balance available and credit limits, effectively impacting the credit score.
- Open more credit accounts like a student loan, car loan, house loan, and others.
- Only apply for a credit or loan when needed, not because you want to.
Be responsible when borrowing money from a bank, credit institutions, or even from your friends and family.