Most people have a very general notion of what an average credit score is, but few realize the importance of a higher score in terms of financial responsibility. Fewer still are aware of the way in which a high score can help secure a much better deal on a mortgage or even on a car. For the most part, this is where credit scores really come into their own.
Credit scores, however, vary enormously from lender to lender, so it’s important to understand the concept behind them before looking to borrow anything. To put it simply, a credit score is the sum total of your current credit information, minus any defaults or bankruptcies you may currently be carrying. As such, they are calculated based on the most recent available
information for each individual. Although it is understandable that a loan or mortgage application would not have been granted had the applicant been carrying scores as low as those of bankruptcy, you can be sure that you will pay a premium for having such a high credit rating.
Credit scores are primarily based on three factors: payment history, balances, and types of credit. These are then converted into a numerical scale to aid the decision-makers in assessing your chances of getting a loan or mortgage.
Paying off your debts and making timely payments is one of the best ways of boosting your score. A good credit report is therefore essential for maintaining an excellent rating. A history of no late payments, six-month minimums on your accounts, a steady income over time, low debt to-
income ratio and a reasonable level of available credit are all points you need to work towards, as they are the basis of your credit report.
Your level of credit card balances also plays a big part in your overall score, particularly if you are carrying a balance over a long period of time. This means that a high credit card limit is a prerequisite in order to get approved for a loan or mortgage, and as such is something many people are unaware of.
Another key factor to having a good score is having a sufficient amount of available credit card or loan borrowing power to cover your basic expenses and the essentials. If you are unable to keep up with repayment schedules, you could have to suffer higher interest rates and even lower limits than others with a lower score.
Some lenders prefer to base their decisions on your average credit score in terms of being able to make their payments. The more responsible you are in repaying your loans, by following a regular payment schedule, the higher your score will be. This is not to say that people who skip payments and end up defaulting on their credit cards will not be offered credit, but if you have
consistently made your payments on time, lenders may be less inclined to approve loans to you.
It should be noted that credit scores are not directly correlated with the types of credit cards or loans you choose to obtain. If you have a low credit score because you have taken out a poor deal on a car loan or house mortgage, you may have access to different types of finance to improve your score. However, you must always keep in mind that a low score does not always mean that you have to pay a higher rate of interest. Many lenders use a variety of other factors to determine the value of your credit, including your ability to repay a loan and your credit history.