The dreaded credit score – so much hinges on this mysterious number. Many people have a general idea what a credit score is but few of us know what ours is or how it’s calculated. We don’t worry about it unless we apply for credit and then get turned down.
When you apply for a loan, your credit score will largely determine whether or not a lender will give you money. That’s why it’s so important to maintain a good credit score or rebuild your credit if you’ve experienced a financial hiccup or two.
What’s a Good (or a Bad) Credit Score?
Your credit score is a number between 300 and 950. The higher the number, the better your credit rating. Lenders use it to predict the likelihood that you will pay back a loan. A credit score of 580 means that 580 out of 850 people will repay a loan on time. Not outstanding odds for a lender. A credit score between 660 and 724 is good. Anything above that is outstanding. Anything below 560 is a poor credit score and a lot of lenders will hesitate to lend you money.
How is a Credit Score Calculated?
Your credit score is based on 5 main factors, listed in order of importance:
- Payment history – this is the most important factor that affects your credit score. Creditors report every credit card, car, cell phone, personal loan, or line of credit payment you ever make. They also report missed payments or late payments. Bankruptcies, liens, and judgments are also factored into your credit score. Mortgage payments are not used to calculate your credit score. If you miss a lot of payments or default on loans, your credit score will suffer. Luckily, over time, the impact a missed payment has on your credit score diminishes and after about 7 years it disappears completely.
- Personal debt – people often say that the best way to establish your credit score is to get credit. That’s true to a point but too much debt will also affect your credit score in a bad way. The more you owe the lower your credit score. If you have a lot of debt, for example your credit cards are maxed out, banks will be less likely to lend you money. Your credit score is also affected by the percentage of your credit that you usually use. For example, if you typically owe more than 75% of the credit limit on your credit cards, it will affect your credit score in a negative way even if you make your payments on time.
- Length of your credit history – the longer you’ve had credit, the better. If you’ve had credit for a long time, it’s much easier for lenders to see how well you manage your credit and if you’re a good candidate for a loan. If you got your first credit card just a few months ago, it’s pretty difficult for lenders to predict if you’ll make your payments on time.
- New credit applications – If you’re constantly applying for new credit cards or other forms of credit, it can be a sign that you’re experiencing money troubles. The more credit a borrower takes on, the less likely they’ll be able to make all of their payments on time.
- The types of credit you have – the credit you have now or have used in the past is used by lenders to indicate how well you handle debt. For example, if you have a debt consolidation, loan lenders may take that as a sign that you’ve had trouble repaying your debts in the past.
Other factors that lenders take into consideration when deciding whether or not they’ll give you a loan include length of employment, assets, and the reason for the loan. Borrowing money to take a trip is different than buying a vehicle or home – they’re assets that can be repossessed if necessary.
Repairing your Credit Score
If you’ve damaged your credit there are some things that you can do to repair it. Just be aware that there are no quick fixes and it takes time and discipline to rebuild your credit rating. The best thing you can do is live within a budget and manage your debts. A good start is to pay down your credit cards or line of credit so that you owe less than 75% of your credit limit.
Need a Car but your Credit is Bad?
Do you need a car but a less than perfect credit score is holding you back? Auto Loan Kelowna specializes in providing auto financing for people with tarnished credit histories. Use their quick pre-approval process to apply for a loan today and get behind the wheel of your new car tomorrow.