For an individual to obtain a loan or be approved for a credit card or other line of credit, lenders will assess the applicant’s credit score. Higher scores are preferred, though a low credit score will not automatically eliminate an individual’s ability to obtain a loan. When it comes to understanding the importance of a high credit score, individuals should learn what a credit score tells lenders, what factors can influence it, and what they can do to improve their score.
What Credit Scores Imply
The reason that lenders assess credit scores is to help them get a better understanding of an individual’s financial history including debt repayment. Credit scores primarily indicate an individual’s creditworthiness, which refers to the likelihood that they will pay back a loan. A higher credit score suggests the individual has managed their debt well by making payments on time and limiting the amount of debt they carry at any given time. To lenders, a higher credit score indicates that the individual is trustworthy and responsible when it comes to managing their finances. As a result, lenders will be more inclined to loan money to individuals with higher credit scores. Furthermore, the interest rate on the loan will often be lower for individuals with high credit scores.
Credit scores range between 300 to 850. Scores below 669 are generally considered to be fair or poor as these scores fall below the average American credit score. Lenders will be less likely to approve a loan to individuals with lower scores or may charge a higher rate of interest.
There are five primary factors that influence an individual’s credit score. These include the length of time of an individual’s credit history, the total amount the individual owes, the individual’s payment history, the types of credit the individual possesses, and the amount of new credit on the individual’s account. Of these, payment history is the most influential, amounting to 35% of the credit score, with the amount owed accounting for another 30% of the score.
How to Improve A Credit Score
Fortunately, there are ways individuals can raise their credit scores. This process takes time, however, as individuals must be able to demonstrate their ability to commit to better financial practices. Consistently paying bills on time, increasing credit limits, and maintaining all open lines of credit (rather than closing accounts) are all practices that can help individuals improve their credit scores over time.
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