Credit is a huge part of an individual’s financial portfolio, even in ordinary circumstances. The recent economic slump and the still struggling path to recovery have rendered many to depend heavily on credit as a means to augment the difficult times; thus, it is important to understand what credit score means and how crucial it is in every consumer’s financial status.

Credit Score in a Nutshell

Simply put, credit score is a statistical interpretation of an individual’s credit worthiness to methodically determine his/her capability to pay back the money owed or borrowed. Credit score is principally based on compiled information in your credit files usually summarized in a credit report that can be obtained from credit bureaus or provided by credit reference agencies. In short, your credit score is a numerical expression that signifies your trustworthiness as a debtor – a trust yardstick that tells lending institutions how responsible you are at managing your finances; thus, gauge the financial risk factor involved to help creditors determine whether or not to approve your loan applications.  Credit score is so designed so that banks, credit card companies, credit unions, mortgage companies and other similar institutions can better evaluate the capability of the consumer to pay off bills and credit on time or the likelihood of default in payments and assess other potential financial hazards the creditors might face when lending money to the borrower. It is intended to help make better and fair lending decisions and avoid losses because of bad debts.
Why Is Your Credit Score of Such Huge Significance?

Many of us typically spend a lot more time worrying about our assets rather than our liabilities. What you don’t realize is that there is so much to be gained if you give the same attention on the other side of the balance sheet. Credit Score means more than just a number in today’s business world and financial system. Apparently, there are a multitude of institutions – be it financial or otherwise – that make use of your credit score to help them decide whether to transact business or work with you.

The Significance of Your Credit Score to YOU

• Your credit score may be taken by lenders as indication of the likelihood that you could fulfill your payment obligations and settle them on time, as well. In effect, it holds the key to whether you get approval for loans such as house mortgage, car loan or credit card.
• If you have a poor credit score, financial and lending institutions may deem you to be a high credit risk, which basically means a “risk premium”, has to be added to the value at which the borrowed money is priced. Unless your credit score is downright awful, there’s a good chance that lenders will still approve your short-term and loan installments application, but may be charged a higher interest rate than what is given to someone with a healthier credit score.
• Conversely, a high credit score enables you to get better opportunities when negotiating with banks and other financial entities; providing a better prospect of getting a more favorable interest rate.
• A credit score that reflects healthy credit standing and habit enables you to obtain higher credit limit in your credit card, once consistency in paying on time is established.
• Though it may not be true in all cases, your credit score influences employers to hire or promote you for a job. Periodic credit background check is occasionally done to use as gauge if you are financially responsible; which has some validity as this could somehow indicate sound accountability.
• It is becoming a practice among home and apartment landlords to look into your credit score to safeguard them from the possible risk of delayed rent; or worse, the probability that you would default on rent payments.

The Significance of Your Credit Score to OTHERS

• Most financial institutions consider your credit history as their basic source of information to determine whether or not to approve your loan request.
• A consistently good credit score promotes confidence among creditors and lenders to grant you a substantial loan.
• Lenders generally use your credit score to evaluate the extent of risk you present to them. The lower your credit score, the higher the interest rate they will apply to your loan to counterbalance the probability of loss should they decide to lend you the money.
• Other companies such as TV and mobile phone service companies make use of your credit score to verify your credit worthiness before they decide to do business with or invest substantial upfront cost in you. A high score can help to avoid enormous deposit requirements from such companies.

Building excellent credit score begins with understanding its significance in today’s world and how it can help make life more comfortable. Moreover, you should be aware that credit score is based on your debt and payment history; thus, you have to make the effort to establish your and maintain credit worthiness. Check out the next article for tips on how to attain a high credit score.

Decoding Your Credit Score: What It Says About Your Creditworthiness

When you see a credit score of 560, 675, or 750; what comes to mind? What exactly does this 3-digit number tell you? One thing’s for sure…it’s not just another number. This article will show you from top to bottom what constitute excellent, fair, average, and bad credit scores; and their inferences, as well.

The Upside of Having High Credit Scores

Whether you are aware or not, your credit score plays a significant role in several aspects of your existence. You need a home, convenient and comfortable transportation (yes, I’m talking about your dream car); you want to start a business…the list is endless it seems. And in a volatile economic climate where you can’t always make cash purchases, you need borrowing power for these numerous needs and wants.  So what has your credit score got to do with it? Plenty. Your credit score holds the key to your creditworthiness; and more often than not, lenders use this all-important 3-digit figure to judge your reliability and how much of a risk you are.

And this is why it’s crucial to keep your credit score in top form. A high credit score is probably the primary boost to your financial life that could save you thousands of dollars. Your high credit score shows that you’re not likely to default on payments, given your responsible credit history. Lenders get the perception that you’re a low-risk borrower, indicative of the high probability that they would get their money back. Moreover, your high credit score puts you on a par with creditors who wants to do business with you; giving you high leverage in determining which lender could give you the best terms and lowest interest rates.
So if you’re still asking what you can expect from a high credit score, it is this: Simply put, you can borrow more money and get a better shot at getting competitive interest rates.

Now that you know the bargaining power that a high score can give you, it’s time to check on what level of that power you are now.  Find out on the following credit score benchmarks.

780+ (Your mortgage loan is a done deal!)
Definitely the stuff that borrowing power is made of. This score cuts across two categories as defined by range: Excellent and Very Good. If your “780+” credit score actually reached the coveted 800 (or over) mark, you’re considered an Excellent Credit Risk, which mean you probably have established multiple credit/loan accounts that have all been paid on or ahead of time for so many years; showing an extensive history of responsible credit utilization. Further, no collection accounts or bankruptcy filings could be found on your credit report. Guess what…you can get the best credit deals in town. With this kind of credit score, chances of getting your loan application disapproved by financial institutions and lenders are nil and you’d be quoted the lowest possible interest rate to boot. In short, you’re the “royalty” in the credit business. You’re almost perfect with only the slimmest probability (1% delinquency rate) that you’d be late in any payment inside 90 days, over a period of two years. It’s interesting to note that only 13% of the population is able to attain this credit status.

720 – 779 (Your bargaining power is good!)
If your score falls in this range, you’re part of the 18% population that belong to the Good credit category and are considered Low Credit Risk. Your credit report may have registered late payments in the past but all your current accounts are paid on time. Your credit card debt couldn’t be classified as excessive either – just standard amount. From the lenders point of view, these virtually guarantee approval of your loan application; however, interest rates definitely come into play here. You’d still be presented with competitive terms and rates, but not quite the best a creditor could offer. It may not be a great time to pursue that plan for a long term loan – like a mortgage, for example. It’s not something dire, though; it might well be worth the trouble to defer it while you try and nudge that score higher.

659 – 719 (Average might work; but you may have to do some fixing!)
Average credit is the kind of category you’ll get yourself into if older negative items or derogatory remarks appear on your credit report. Perhaps you are running higher than usual credit card/debt balances or you may have been trying to apply for several new credits in the recent months. This doesn’t mean your loan applications won’t be approved. Being considered a Moderate Credit Risk has its downside, however. It all depends on the type of credit you seek and what the lenders read in your credit history, certain restrictions may be imposed. You could still get fairly decent interest rates, but they are certainly not the best available offer. Here’s the deal…you can easily fix that with a little help from trustworthy companies that can give you reliable information and sound advice on how you can improve your credit.

619 – 658 (You need some help to lower those sky-high interest rates!)
This category has been called many names, Bad, Poor, Weak, Subprime credit; but they all describe the same thing – you are considered High Credit Risk by lending institutions and credit companies. What make you land on this category? Some of the reasons for getting a lower than average credit score may be that you have very high balances of credit card debts or amounts you owe creditors; or your credit report contains damaging items that show late payments, collections, and especially bankruptcy filing. If your credit score is in this category, it’s doubtful that you could get competitive interest rates even for standard credit products. There may still be a chance that you could get an unsecured loan, but interest rates would certainly not be pretty. And because of the high interest rates, you could even end up paying a lot more over an extended period of time. Worst scenario: Lenders could deny you credit or insurance.

Below 618 (Yes it sucks and you are in deep trouble!)
Need I say Very Bad credit? That’s the category for any score range that falls below 618; and yes you are deemed Extremely High Credit Risk. If your credit report is splattered with collection accounts, bankruptcy filings, or even late payments; reckless applications to open new credits; and very high credit card balances, among other things, no mainstream creditors would likely approve your loan request/application – not without a co-signer or a huge down payment. You might still be able to obtain loan approvals but it wouldn’t even come close to what you imagine it to be. You’d most certainly be charged with extremely high interest rates or premiums; you could get sucked into deeper debt. What you seriously need is a professional help to repair your credit immediately. You might not realize it but you could be compounding your credit mistakes, which could only worsen if you don’t take positively decisive action. Seek reliable credit counseling to fix your credit. Only then can you consider applying for a loan.

Credit score may mean different things to as many different people or entities but the bottom line is it defines your creditworthiness and your overall attitude and behavior towards handling your credit and financial affairs responsibly. Keep this in mind and you’ll find it easy to maintain a high credit score that allows you a strong borrowing and bargaining power.