Credit Scores are one of the main factors in making financial decisions. Credit scores determine the type of loan you may get and the rates you pay. To help you navigate the convoluted web of credit score information, we’ve put together a basic set of guidelines that may help you determine where you stand in terms of credit.
This guide assumes that you meet other requirements, such as:
- Enough money for a down payment (at least 20% of the overall cost of the product, service, etc.)
- Additional savings
- Income totaling at least three times the amount of the total payment (which relates to your debt-to-income ratio)
With the requirements above kept in mind, the below shows what varying credit scores mean to lenders.
What Your Credit Score Says About You:
- Excellent (800–850): This credit score can mean opportunities to refinance older loans at more attractive interest, and excellent odds of approval for premium credit cards, auto loans, and mortgages.
- Very Good (740–799): This credit score signifies a proven track record of timely bill payment and good credit management. Late payments and other negative entries on your credit file are rare or nonexistent, and if any appear, they are likely to be at least a few years in the past.
- Good (670–739): This score may provide you with access to a broad array of loans and credit card products, but increasing your score can increase your odds of approval for an even greater number, at more affordable lending terms. Additionally, you will probably want to manage your score carefully to prevent it from dropping into a more restrictive credit score range.
- Fair (580–669): Fair credit scores can’t be made into exceptional ones overnight, and bankruptcies, foreclosures, and some other negative issues contribute to this rating. No matter the cause of your credit score, you can start handling credit more, which can lead in turn to credit-score improvements.
- Very Poor (300-579): Converting a Very Poor credit score to a Fair or Good credit score is a gradual process. It can’t be done quickly. But you can start to see some steady score improvements within a few months if you begin immediately to develop habits that promote good credit scores.
While the information above is a generalized outline of credit scores, the decision is ultimately up to the entity you are working with to make your next big purchase.
The Relationship Between Credit Scores and Interest Rates:
Many companies use your scores to predict your future financial behaviors. Good credit scores may suggest you’re responsible and practice good financial habits- like paying your bills on time and paying back the money you borrow.
One way lenders limit risk is by charging interest. In the eyes of a lender, the higher your credit scores, the less risky you are as a borrower. The less risky you are as a borrower, the more likely you are to qualify for low interest rates- and the lower those rates might be.
All scores have the same primary goal: helping lenders and other potential creditors understand how risky it may be to do business with you. A higher credit score generally means that you’ll pay lower interest rates, fees, and deposits. Over the lifetime of a loan, even a slight reduction in rates could help you save thousands of dollars in interest.