Most people who aren’t aware of the credit scoring system are not aware that it is a part of the process lenders use to determine if they should be approving requests for a mortgage, personal loan, or credit card. A credit score represents a three-digit number they use to help determine if you should be approved for a loan. It is a picture of your credit risk that the lender can use to evaluate your debt settlement ability.
Your credit score is also used when lenders determine whether or not to approve a small business loan. According to Lantern by SoFi, “Small business loans can be used for various reasons. When you need capital, a business loan for a small business is necessary to get up and begin a business setup. Many options are available, whether you need the finance to purchase equipment or expand to new locations.”
Ways Your Credit Score Affects Your Financial Benefits
For example, if you are looking to borrow $200,000, and your credit score is 760-850, then a lender might charge you around 3.37% interest on the loan. However, if your credit score is in the lower range, 620-639, they might charge you around 4.869% or higher.
Although a lower credit score might seem like a minor inconvenience, it can increase the cost of your mortgage by almost $200 a month. Over the life of the loan, the higher interest rate would have you paying over $67,000 more.
Determining Your Score
The credit scoring system used by credit agencies is unique. According to Fair Isaac, its system considers various factors to develop a score. The bureaus’ five components considered at the time of loan approval include payment history, length of credit history, how much you owe, new credit inquiries, and the type of credit you’re using.
Your payment history is a component of the credit score that helps determine how well you can pay off your debts. It includes various types of credit cards and loans, such as student loans and mortgages.
Your credit utilization is a component of your credit score that helps determine how well you can handle your financial obligations. High balances or those who have been over-indebted can negatively affect your credit score.
Your credit history is a factor that helps determine how long you have been using and maintaining credit. Having a long history of paying off debts and maintaining responsible credit management can boost your credit score.
The type of credit that you have is a factor that helps determine how well you can handle your financial obligations. It can include various types of loans and credit cards. However, you don’t have to have all of these accounts to manage a good credit score. Sometimes they can get misused. For instance, if you plan to buy a boat, using a credit card could affect your credit score.
New credit inquiries can affect your credit score. Each new line of credit you apply for can count as an inquiry, increasing the risk of getting your application rejected. It can be risky to open several credit accounts in a short time, especially for people who have not established a solid credit history.
Good Credit Means Higher Approval Odds
Having a good credit score can aid in lowering your cost of borrowing. It can also help you establish a better credit history and improve the amount of money you spend on credit. Paying off debts and putting aside money for savings are some of the innovative financial moves that can help boost your credit score.
