What Do Credit Scores Mean Anyway?
Consumers’ credit score indicate to lenders that they are capable of managing credit and repaying their debts. The FICO score is designed to help lenders decide who should receive credit. If lenders believe that consumers are not capable of repaying loans, they are not likely to extend credit to them. What do credit scores really mean to consumers and lenders?
The Meaning of Credit Scores
The credit score can affect the quality and type of loan that consumers receive from lenders. No lender will lend to consumers with shaky credit without imposing an undesirable amount of interest to the loan amount. Here is a guide for consumers to understand how lenders view their credit when they apply for loans:
A credit score of 720 and above is amazing. The consumers with this high credit score are the consumers that lenders want to come walking through the door every day. Consumers have the option to shop around for rates due to their phenomenal credit score. A good credit score comes in handy when the time comes to make a large purchase like a home. There is a huge difference between paying 7% interest on a $200,000 home loan and paying 3.5%. In addition, credit card interest rates are generally lower for consumers that fall in the 720 and above credit range.
A credit score of 675 to 719 decreases consumers’ chances of getting the best interest rate. These consumers may not have any problem getting a loan, but they may have to take a loan rate that is slightly higher than they want to receive. Consumers will likely receive a slightly higher interest rate on a purchase such as an auto loans, but they will not likely see more than a one-point increase on the loan interest rate. The lenders who fall in this credit score category still have a great deal of bargaining power to negotiate their interest rates on loans.
A credit score of 620 to 674 decreases the likelihood that consumers will receive credit. This credits score is considers “below average” by lenders. Consumers can expect to pay a few more points of interest than the consumers with an excellent credit score do. Consumers may be expected to produce documentation regarding their bank accounts, proof of employment, and more to receive a loan from any lender. These consumers can also expect to pay more for their debts over the life of the loan. Some consumers work to improve their credit score so that they can refinance their current loans for a better interest rate.
A credit score below 620 is considered a low credit score. Consumers that fall in this category are considered a risk to lenders. They may still receive loans but at a hefty interest rate. These consumers may likely receive the highest interest rates allowed by law. These consumers can possibly improve their credit score so that they can refinance to receive a lower interest rate.
Consumers with a high credit score have the biggest advantage of all consumers. It is possible to improve credit and receive the benefits that those with excellent credit receive. It is important to know how lenders view potential customers when the time comes to receive credit.