When you apply for a home or mortgage to a bank or any other financial lending institution, one of the things that will be given some serious consideration is your credit score. The credit score ranges from 300 to 850 where 300 is the lowest possible credit score, and 850 is the highest credit score that you can achieve.
Your credit score shows your creditworthiness and your overall ability to pay back your loan or credit obligations. The credit scores are calculated by the credit bureaus or other financial institutions using the credit information from your credit-related activities in the past e.g. your credit payments history.
If you have a credit score that is under the 600 mark, you somewhere in the ?poor' to ?fair' or average category on the grade scale. You might not get credit or mortgage applications approved from all of the banks, but you can try with the local or small-scale banks. They are more prone to lending you and charging you higher interest rates.
You can also apply for government housing or mortgage loans. These loans are easy to manage, more flexible and charge you lower interest rates compared to other lending institutions in the market.
What is a credit score
A credit score is needed for you to be able to get a loan or credit. The reason behind this is because it will help financial institutions to determine your creditworthiness. They will also see every loan that you made and the payment history that you have. Find out more about it by reading the information below.
Credit scores are calculated based on the proprietary algorithm. This will include the person's outstanding debts, payment history, and the length of the individual's credit history.
Credit scores can range from 300 to 850. The higher the individual's score, the lower the risk. People who have lower credit scores are considered high risk, which will make lending companies ask for more requirements.
About Fico scores
Fair Isaac Corporation is the one who established FICO, and it is one of the most commonly used credit scoring systems today.
According to FICO, 90% of the most reputable and respected lenders today are making decisions according to this kind of credit scoring system. Get to know more about Fico scores by reading the information below.
How are credit scores calculated?
The weight of each of the five categories are; 30% of amount owned, 10% is for the new credit, 15% accounts for the length of credit history, 10% is the credit mix and the last 35% accounts for the person's payment history.
The FICO score takes into consideration positive as well as negative aspects of the credit report. The percentage or the weight of any of the categories mentioned above may differ from a person to another depending upon the information available in the credit report.
The FICO score takes all of the information from your credit report. However, the banks or any other lending institution might look at your income, type of credit and employment history when you apply for a loan or mortgage.
Once a certain lender asks for a client's credit report, they can also ask for the Fico score. Other sources say that your Fico score will include 35% of your payment history, 30% of your credit utilization, and 15% as to how long have you been borrowing.
Explanation of credit score ranges
It is important to know the category that you fall into when it comes to credit score for you to be aware. The range of a credit score can go from 300 to 850. Always remember that the higher your score, the higher the chances of you to qualify for a loan. There will also be instances where a financing company is okay with 650 scores, while the other is fine with a 750 score. It will all depend on the lender itself.
A lender or a bank will check your credit score if you qualify for the application that you are requesting. Here are some of the credit score ranges that you should know.
Bad credit score
People with a credit score below 579 is known as high risks. Foreclosures, poor payment history, and bankruptcies are the reasons why people fall into this category.
Good credit score
A good credit score ranges from 680 to 719. People with this credit score can expect approvals and interest rates that are better.
A very good credit score ranges from 720 to 799. People with this credit score is known to be small risks, and they often get loan amounts that are higher than usual.
An excellent score ranges from 800 and above. Financial freedom is expected to people with this score.
What does it mean to have a credit score under 600
Higher your credit score, greater are you chances to acquire loans, credit from the banks and other financial lending institutions. The credit score shows how you have managed your loans and debt in the past and whether you will be able to pay back your loans and debts on time or not.
The credit score that is under 600 but above 550, falls in the average category on the grade scale. Most of the banks in your region will be willing to lend you credit. However, you should look for the one that associates lowest cost of debt to your loan.
Mortgages with a credit score under 600
With this credit score, you can most probably get the approval for your government loan options such as FHA in the United States. With this credit score, you can also check with the mid-tier banks as some of them would be willing to lend you credit for your home loan or mortgage.
You can also go to Credit Unions which are not for profit organizations. You have to become a member of a credit union, and they can lend you money to cover your financial needs.
However, if the required amount is not very large, you can get yourself a credit card. You can borrow through your credit to pay for mortgage or home loan. The credit card companies pay little attention to your credit score. But, their interest rates need to be checked before time.
Things you can do to improve your credit score
Having a bad credit score is similar to having poor health. Therefore, you need to take measures that ensure you are continually improving on it. The most efficient way of repairing bad credit is good management over time. Improving your credit score is necessary for you to be eligible for better terms and rates for loans in the future.
Regular credit report checks
You are advised to monitor your credit report regularly to see if it has any errors. A credit report brings you up to speed on your status as a debtor. Ensure that the payments are reported correctly and the amount owed to each creditor is correct. Errors must be disputed to your credit bureau promptly.
Reduce your debt
Most people usually take loans just because they are eligible for them without considering the potential damage to their credit score. For a start, you can reduce your reliance on credit cards. Design a plan that ensures you give priority to your debts that have the highest interest rates.
If your monthly premium is not automatically debited from your account, you need to set up a payment reminder. Timely credit repayment improves your credit score over time. Some financiers usually send emails or texts to their clients to make payments.