The FICO credit scoring system ranges from a low of 350 to a high of 850. These numbers are used to determine credit history or “credit worthiness”.
What are the factors that can affect your score?
There are five main factors that in your credit report that affects your final rating. These are:
- timeliness of payment
- the amount of debt and types of credit
- credit limit usage
- length of credit history
- public records
The “public records” section is where court judgments (bankruptcy, tax liens, foreclosure) are placed. Such derogatory remarks can remain in your report for up to 7 years. After that period, be sure to request the credit bureaus to delete the remark from your record.
Timeliness of payment makes up 35% of your final score, the biggest percentage among all the five factors. Thus, how you make payments to your creditors really makes the difference. If you are in the habit of being late in submitting payments, then you can expect to have a poor rating.
The types of credit you have make up 30% of your final rating. Ideally, you want to manage at least three different types of account (credit card, home loan, personal loan, car loan, etc.) under your name. It will show that you are capable of managing your personal finances.
How Lenders View Credit Scores
A score of 700 to 750 is considered as excellent. Banks and lending companies reserve their lowest interest rates and best deals to customers with excellent rating. Consumers who enjoy the highest scores have the strongest negotiating power. They can make demands to get the lowest rate possible before signing up with a lender.
A score of 650-700 is considered as good while a rating of 500-640 is fair or acceptable. You can still get approved but the rates and repayment terms may not be as good as that offered to customers with the best scores.
Meanwhile, a score of 500 and below automatically makes you a high-risk borrower in the eyes of lenders. Lenders with rigorous standards may reject your application while lenders who offer sub-prime loans may offer high interest rates and impose more restrictions.
Different lending companies have varying standards when it comes to determining the acceptable credit score. There may be a difference of 5 to 10 points when gauging credit rating as poor, fair, good or excellent. To be sure that you will get the approval of lenders, make it a goal to achieve the highest possible score through good payment habits.
