Banks and lenders check the credit score of an individual before they grant a loan. It’s a crucial consideration that determines whether someone will get a loan. Also, credit scores will determine the interest rates and the loan amount that the lender can offer. Credit scores depend on the credit history, and can dictate the amount of money that someone will pay.

Average Credit Scores

Credit scores scale range between 300 and 850, the former being poor. Generally, a score of 680 and above is considered good, and a score of over 750 is deemed excellent. However, determining whether a credit score is good or bad is hard since it depends on the lender. Banks and other financial institutions have different opinions as to when a score can be considered good or bad.

For instance, a score can be accepted by one loan agency and rejected by another.

Factors that Affect Credit Scores

There are different credit scoring models, and all have different methods of calculating scores. Below are the common factors that affect credit scores.

Payment History

The payment history of an individual may comprise over 30 percent of the total score. It’s the most critical factor that agents use to calculate credit scores. Banks and lenders believe that past behavior can be used to predict future long-term behavior.

One can improve his or her score by making timely and consistent payments. Nowadays, people don’t rely on landlords and lenders to report credit payment information to credit bureaus. The bureaus allow people to self-report good payment behavior.

Credit Utilization

The amount of available credit that one has borrowed comprises approximately 30 percent of the total score. Individuals who max out or get close to credit limits usually have poor credit scores because they can’t handle debts responsibly. People with excellent scores typically have a credit utilization of less than 5 percent.

Duration of the Credit History

Credit bureaus check how long an account has been open and the duration since the last action. It makes up over 10 percent of the final score. It’s hard for a new account to have a perfect score. However, it doesn’t take long to achieve an excellent rating. A lengthy credit history offers more information and a better picture of the financial behavior of an individual.

People who don’t have credit accounts should start using credit, while those with short histories should make consistent and timely payments.

Credit Mix

Credit mix comprises ten percent of the total score. Repaying different debt products shows that a borrower can handle various sorts of credit. Individuals with no credit cards are considered as higher risk by credit bureaus.

New Credit Accounts

New credit may account for up to ten percent of the overall score. However, opening several credit lines will not improve the total score. There is a high chance that an individual is facing financial problems if he/she opens multiple credit lines. Apply for new credit accounts only if there is a need for one.

New accounts reduce the age of the credit history, lowering the final score.

Range of Credit Scores

Lenders reject credit scores less than 550 because they are considered bad. However, people with bad scores can still raise them by making payments on time. It’s hard to get loans such as home loans with bad scores.

A score that ranges between 550 and 660 is considered poor and high risk. One can get credit with a poor score, but comes with high interests and a short repayment time. Addressing specific problems can improve a poor score.

Scores ranging from 620 to 679 are viewed as fair by lenders. Loan agencies usually approve applications from individuals with fair scores since they are considered less risky.

A score that ranges from 680 to 739 is termed as good. Loan agencies are comfortable with good credit scores and can approve loans quickly. Borrowers with fair scores get lower interests on their loans. Only 5 percent of people with good credit scores are delinquent.

An excellent score ranges from 740 to 850. Borrowers in this range get the best interests, and lenders approve their applications quickly.

What can an individual get with a good credit score?

Good credit scores matter because they determine the chances of getting a loan. A good score can help an individual get an unsecured credit card with a low-interest rate. Also, it can help you get a mortgage and a desirable car. Good credit scores offer a convenient way to pay for expenses in case of emergencies.