Credit is harder to obtain today than just a few years ago virtually because of the historical economic meltdown that hit our country several years ago. Though the average FICO score to gauge a potential borrower’s credit-worthiness still stands at 690, it is potentially harder for some applicants to get credit because the recession impacted their credit score negatively. Many experienced scores dropping by more than 200 points. And simultaneously lenders are now also following strict credit regulations to mitigate risk of default making it harder than ever for creditors to qualify for loans.
Here are some FAQ and key pointers to help you understand your credit score, how it’s derived, what it means, and how to improve it.
Interest rates have a big impact on the cost you pay for borrowing money. Since interest rates on loans aren’t set arbitrarily, financial institutions use borrowers’ credit score to measure the creditworthiness of the borrower. The higher your credit score, the lower the interest rate you will be charged.
Therefore, it is wise to check your credit scores about 30 to 60 days in advance of you actually buying a car to ensure there are no problems or issues to address.
What is a credit score?
Your credit score is a three-digit number that takes into account all of your credit history and indicates your risk. The FICA, or Fair Isaac Company score, is generally between 300 and 850, and lenders assess your risk or creditworthiness based upon your score at any point in time. A lower score indicates higher risk; conversely, a higher score indicates lower risk to a lender.
There are three major credit bureaus that you can contact for your credit report: Experian, Equifax and Trans Union.
How is my credit score calculated?
Credit scores are determined by evaluating the five (5) criteria:
My score is over 600. Why am I being turned down for more credit?
After the financial crisis in 2008 – 2009, lending money for big-ticket items became much more stringent. Lenders want to avoid the risk of giving loans to creditors with a weak credit score. Unfortunately, scores under 650 are considered high risk and considered poor credit scores However, that doesn’t mean you can’t get credit, but you may be charged slightly higher interest rates.
What is considered a good score?
A credit score between 690 – 700 is considered a good score and a candidate to lend money to. A person with a score of 700 or above has shown that, over time, they have been able to manage their finances and make timely payments.
How do I improve my credit score?