Most people are unaware of how the credit scoring system or credit scores work until they need to make a major purchase; for example, buying a home or taking out a loan to start a business.
A credit score is simply a three-digit number that’s used by lenders to assess a loan applicant before a loan or mortgage. The number also determines the interest rate that you’ll be charged for this credit.
Credit scores range from 300 and climb up to around 850—the higher your score, the more likely you are to receive better terms.
Here’s everything you need to know about how credit scores impact your financial future:
How Your Credit Score Can Affect You
To understand this better, let’s consider an example. Let’s suppose you need a loan of around $200,000. This loan is in the form of a fixed-rate mortgage for thirty years.
Now let’s say that your credit score is around 750–800 and above. In this case, most lenders are likely to charge you an interest rate of around 3.3%.
On the flip side, if your credit score is low and falls between 600 and 650, the interest rate is likely to go up a couple digits, hovering on average around 4.8 percent.
How Your Credit Score Is Determined
Now that you have a good grasp of what credit scores mean, let’s look into how they are determined. Fair Isaac has devised a scoring system that calculates credit scores while taking five components into account.
These five components are payment history, the length of your credit history, how much you owe, the type of credit, and inquiries. Even though each of these components holds a different weightage in calculating your score, the bottom line remains that if you manage your credit well, it will lead to a higher score.
This means that paying your bills on time and living within your means can actually pay off in the long run by promising you better creditworthiness when it comes to making the biggest purchases of your life.
However, if your credit score is low and you’re looking to restore it, we suggest talking to a credit repair specialist. If you’re looking for one in Spartanburg County, SC, feel free to get in touch with us!
At Masters Credit Consultants, our services include specialized credit counseling and credit restoration services that help you achieve your financial goals. If you have any questions, call us at 1-844-620-8796 or write us an email at email@example.com.