Credit score is one of the determining factors whether or not your loan application will be approved by the lender. Therefore, if your credit score is low, it can be a challenging task to get a loan on favorable terms. Generally, the creditor uses the credit score to analyze the borrower’s creditworthiness. If your credit score is high, then he is considered as financially responsible and a low risk borrower. In fact, you should avoid taking out a new loan if you’ve overwhelming debts and your credit score is low. In this situation, at first consolidating the high interest credit card debt would be a handy option for you to re-establish your credit score from a scrape. However, most of the people wonder what the credit score is all about and how it is formed. You can continue reading to get a basic information on your credit score and its importance in your financial life.
How your credit score is evaluated?
Credit score is calculated on statistical models developed by Fair Issac Corp, a financial company founded in 1956. The credit score calculated by the company is also known as FICO score. In order to evaluate this credit score, there are five types of information that are considered.
1. If you’re struggling with overwhelming debt, then your credit score may drop. There are some other factors to lower your credit score are owing a lot of money, being close to the credit limit on your credit card or large balance remaining on an installment loan.
2. The period of time you’re using the credit and if you’ve recently started using your credit card, the credit score will be low.
3. In case you’ve recently opened a few number of new credit accounts, it can be one of the reasons for your low credit score. Make sure there are no credit inquiries on your credit report; otherwise, it can lower your credit score.
4. Your payment history can be one of the determining factors whether or not your credit score will drop. If your credit history shows charge off, foreclosure, judgment or bankruptcy, then your credit score can drop. Another reason for your credit score to drop is your late payment on the bills. So, try to pay off the bills on time to reestablish your credit score and repair your credit report. It’s a better idea to pay off the bills and leave the accounts open as it’ll add positive information.
What are the benefits of credit score?
Here are some of the benefits of credit score that you can consider if your credit score is low:
- The criteria for credit score is same for everyone.
- If the credit score is high, then you can get more credit.
- You can get a new loan with a low credit score but the interest rates are high on the loan.
- If the credit score is high, then the borrower is considered to be a low risk borrower.
- High credit score gives an opportunity for faster credit decision.
Therefore, try to acquire more information on credit score before you apply for a new loan. If your credit score is low, then you can start working on it to get a loan on favorable terms.