Credit Score and How It Works

What is credit and what makes it good or bad? Knowing how your credit is affected will ensure you keep it healthy and manage it well.

A credit is simply your ability to borrow and the amount to be given. Lenders use your credit to judge your reputation as a borrower; whether you will be able to repay or not.

Most of the traditional lending institutions will use your credit score to determine whether to approve your loan or not and how much interest to charge. Your borrowing history is the main source of information on your credit report.

Other details on the credit score history include;

  • Loans you have used in the past 7 years, whether paid or unpaid
  • Loans you are currently using
  • The amount borrowed
  • Payment history-late or timely payments
  • Records on bankruptcy and foreclosure

Most lenders will use a computer program to go through your records and create a free credit score. A high score (above 720) means there is a high chance of getting approved for a loan at impressive rates.

A score of 700-749 is considered good. A score of 650-699 is a fair rating. A score of 550-649 is poor and 550 and below is a poor rating.

This is because a bank, credit union or online lender does not have the time to manually go through every applicant’s credit report. As a result, they will use a computer program, which will look for patterns, red flags such as outstanding debts and characteristic to spit out a credit score needed for a loan.

A lender will often request your credit report from a credit bureau or better known as credit reporting agencies. The federal law allows a person to view their reports for free at least once a year.

The 3 Major Credit Reporting Agencies

These are like information warehouses, storing data from lenders you have previously worked with and other public records databases.

This information is distributed to lenders when you apply for a loan. The 3 major agencies are;

  • Experian
  • Equifax
  • TransUnion

Experian credit score range

The score range here is between 300 and 850. There is a PLUS score is included but is only meant for consumers and falls on a scale of 330 to 830. Most landlords use Experian to do background checks on tenants.

Equifax credit score range

The current range on this reporting agency is between 300 and 850. The national equivalence score found on its website is mainly used to aid investors when building a portfolio for a borrower but cannot be used to judge a person’s loan credibility.

Trans Union credit score range

Many financial institutions use this agency to manage existing accounts of customers. It has a score range of 300-850. It is possible for a lender to predict the chances of you defaulting payment in the next 90 days.

It is important for the ratings on these bureaus to be accurate to avoid being rejected for loans. You will also face difficult situations during job applications if there are errors.

Differences between a credit report and a credit score

A credit report is a document entailing all of your credit history and may include a period of the past 10 years. It displays your identity, employment history, any inquiries into your credit and records of bankruptcy.

However, it does not have personal details such as your medical history, race, bank account or marital status. It is generated by all the above 3 reporting agencies.

A credit score is a 3 digit number in which lenders use to determine your loan eligibility whether you are applying for a car loan, mortgage or a credit card.

What situations result in Good or Bad rating?

A good rating is mostly determined if you have past timely payments and less debt. A person with a bad rating often has multiple debts, default past payments and borrowing more money than they make.

The kind of credit score needed to buy a house would be one that is of a higher value.

Importance of credit to consumers

There are various purchases which are expensive for average earners but are made possible through credit. If you needed to buy a house or car and have a credit score needed for a loan, then it would be possible to make monthly installments and have the property.

Auto and mortgage loans have equally served the same purpose. Buying expensive things in installments is not just a matter of personal fulfillment. It actually results in better standards of living. An auto loan makes it possible for safer and reliable means of transportation between long distances.

A mortgage loan enables a homeowner to manage their living environment and even build home equity if the value if the house appreciates in the coming years. This results in higher earnings.