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When you’re looking to finance a big purchase like a home or car or secure educational loans for college, lenders and financiers aren’t going to hand you the money without considering your ability to pay back the loan. One might think this is based strictly on your monthly income. After all, if you earn a lot of money, surely you can repay what you borrowed on time, right? Not so fast. While some lenders may consider your ability to repay based on their undisclosed criteria income, almost every lender will consider your history as a borrower in terms of your creditworthiness. They want to know the likelihood that you’ll repay based on your record. This creditworthiness is usually indicated by a three-digit number known as a credit score.
Knowing Your Credit Score
This credit score or credit rating provides a quick snapshot to lenders about how responsible you are concerning managing debt. The higher your score, the better.
Better credit scores indicate that you’re more likely to repay your loan on time, making you a lower risk for defaulting on a loan.
Borrowers with higher scores tend to get approved for loans with better interest rates, repayment terms, and lower down payments.Your credit score and underlying history are some of the most vital parts of your financial life. Learn how it goes far beyond being approved for a loan or credit card!Click To Tweet
While each lender has their own internal criteria for approving and rejecting loan applications, credit scores tend to be categorized according to this range from the Fair Isaac Corporation or FICO, a company that measures credit ratings:
- Poor: 350 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Exceptional: 800 to 850
If you’re planning to apply for credit in the near or not-so-near future, it’s important to know your score beforehand. Different types of loans will have different criteria for loan approval as well as the repayment terms.
You’re entitled to a free credit report each year from the three credit bureaus, Experian, Equifax, and TransUnion.
Applying for a Credit Card
There are a variety of credit cards out there with different features and benefits.
Applicants with excellent scores or better will probably be approved for any credit card, especially the high-end cards that come with the best perks and bonuses.
Applicants with fair scores can expect to be approved for retail store credit cards or secured cards designed to help establish or build credit.
Purchasing a Car
Unless you’re buying a vehicle with cash, you’ll probably need to finance the purchase either through a dealership or a third-party lender, such as a bank or credit union.
As you’re doing your research on vehicles, you need to know your credit score as well as the average scores necessary for the purchase. Remember, higher scores get the best deals, even for leasing.
Although car loans were provided to borrowers with scores below 600, new car purchasers average around 718, a good score, and used car buyers tend to have fairer scores around 659.
If you have a low score, you may consider putting off a purchase until your score becomes good or better.
Leasing a Home
When looking to rent an apartment or house, you can expect to have a credit check run after applying. Landlords prefer tenants who are reliable when it comes to payments.
Applicants should have a score between 600 and 620 to rent a home in most cases. However, the location and luxury levels can significantly change credit criteria.
Buying a House
Most homebuyers need to secure a mortgage to purchase a home. Most potential homeowners seek a mortgage loan that has a 15- or 30-year repayment.
The amount of money you’ll pay over the life of a mortgage will be directly impacted by the interest rate. So, it’s crucial to get the best rate you can.
Buyers with credit ratings above 760 are usually offered the best rates. Not only does this mean less money spent in the long run, but your monthly payment can be hundreds of dollars less than the payment associated with a higher rate and lower credit score.
Besides numbers associated with health, your credit score is one of the most important numbers in your life.
It plays a critical factor in your ability to borrow money and take on debt for obtaining an automobile or a home. Some employers, insurers, and utility companies also review your credit history, so it’s important to work on raising and maintaining a high rating.
Krystle Cook – the creator of Home Jobs by MOM – put her psychology degree on a shelf and dived into a pile of diapers and dishes instead. She is a wife and mother to two rambunctious boys, sweating it out in her Texas hometown. She loves cooking, DIY home projects, and family fun activities.