Credit Score Ratings: What You Really Need to Know
By now, you have probably heard about credit score hundreds, if not thousands, of times. Still, you may not fully understand what goes into them, the types of scores, what various ranges mean, and many more details. Below, we cut through the fluff and explain what you really need to know about credit score ratings.
What Goes Into Credit Score Ratings
You might go to an online provider and find out what your credit score is. Once you do, though, all you’ll be given is a three digit number and a general description of where you stand. To supplement your understanding, review the following factors that make up your score.
- Payment History (35%) – This factor refers to paying your bills on time, and it is the most critical of all of them. If you miss payments, your score will fall. If you make them on time, your score will rise.
- Current Debt (30%) – Lenders want to know if you are the type of consumer that carries a significant amount of debt at what time. If it is in the form of a car or home, this will not be a big deal. On the other hand, if you carry credit card debt, that will be a red flag.
- Credit History (15%) – As you might expect, lenders trust those with a long history of paying their bills over those with a shorter history. For this reason, extended credit history raises scores.
- New Credit (10%) – The primary factor that influences this aspect of credit is opening new credit cards. If you do so often, your score will suffer.
- Types of Credit (10%) – While paying a credit card on time and in full every month is impressive, lenders like to see that you can handle more. That is why having multiple types of credit raises your score.
The Consequences of Credit Score Ratings
Having a low score can lead to a variety of adverse outcomes. The following are the four most prevalent of them.
- Large Loans – When a lender offers you a loan on a car or home, they are taking a considerable risk. They put forth many thousands of dollars to help you with the purchase, and need to know they you’ll pay it back. For this reason, large loans have especially stringent acceptance guidelines. If you do not meet their standards, they will reject you.
- Credit Cards – Credit companies take on less risk than large lenders, but still need to know that you are reliable. If you have a poor score, you will either be rejected or have restrictions imposed on you.
- Apartment Rentals – Just like a lender, apartment owners need to know that you can come up with rent money every month. Having a bad credit score signals to them that you cannot, and makes them more likely to reject you.
- Employment – Though not every employer does a credit check, the most thorough often do. The reason is that they believe financially irresponsible people are more likely to cause problems than those with excellent scores. Whether they are correct or not, this is a mindset many companies have.
Kinds of Credit Score Ratings
The following are the three major scoring systems.
- Typical FICO – If you’ve ever seen a commercial advertising a credit score check, this is likely what they were referring to. These credit score ratings range from 300 to 850 and are the most prevalent judge of lending reliability.
- VantageScore – TransUnion, Experian, and Equifax are the three credit bureaus that handle your credit report. Instead of using typical FICO scores, they have their own system. While it had a different score range in the past, it now mirrors the standard range of 300-850. Still, their ratings are slightly different and are worth looking into.
- Industry Specific – Some lenders use a slightly different scoring system for their scores. Typically, these ratings range from 300 to 900.
For each scoring system, there is a corresponding rating. The following are the standard ranges for each of the three methods described above.
- 300 to 600 – Poor
- 601 to 660 – Fair
- 661 to 780 – Good
- 781 to 850 – Excellent
- 300 to 579 – Poor
- 580 to 669 – Fair
- 670 to 739 – Good
- 740 to 799 – Very Good
- 800 to 850 – Excellent
- 250 to 579 – Poor
- 580 to 669 – Fair
- 670 to 739 – Good
- 740 to 799 – Very Good
- 800 to 900 – Excellent
As you can see, the ratings for each system are around the same. The only thing separating them, in most cases, is a small number of points. As a result, having a positive score in one system will almost certainly give you a good reputation in all of them.
What These Ranges Mean
Though every financial system is unique, we can arrange them into ranges to give us a general idea of what they mean.
- Poor – In this range, you will likely be denied for large loans such as cars and homes. Even if you get accepted, your interest rates will be very high. For credit cards, you will experience denials for the best deals and have to settle for either unfavorable terms or secured cards.
- Fair and Good – Now, you will likely enjoy acceptance to most credit and loan programs. Unfortunately, the terms of your agreement will probably not be optimal. Instead, you will have to deal with high-interest rates and restrictions.
- Very Good and Excellent – In these ranges, you will experience acceptance for nearly any loan. Additionally, your rates will be low, which will help you save a significant sum of money in the long term. As far as credit cards, you will have access to the ones with the most perks and benefits.
Every Lender is Different
One thing to note is that while these credit score ratings can tell us many things, they cannot precisely predict what a lender will think of you. Instead, each one will have their own system of grading your financial history. For some, scoring in the “very good” range will allow you to receive their best interest rates, while others will require a higher score. Ultimately, knowing where you stand is very useful, but does not ensure the treatment you might expect from a creditor.
Why Every Point Matters
Most lenders are massive corporations. For this reason, they do not have time to delve into each borrower’s financial history. The result is them having a tiered system based on ranges. The following is a rough representation of what they might look like.
- Poor: Loan denial.
- Fair: Acceptance with a high-interest rate.
- Good: Acceptance with a moderate interest rate.
- Excellent: Acceptance with a low-interest rate.
When this lender looks at your score, there is very little chance that they bump you up to a higher range because you are close to it. Instead, you will be filed away as whatever range you fall into, and given the standard offer that corresponds with that designation. As we explained above, a slight change in interest can have significant financial consequences. What could end up happening is being a few points off of a higher rating costing you thousands of dollars over the length of your loan. This system of slotting you into a range is why every point matters. Raising your score just a little bit can put you in a new designation and give you access to excellent deals.
In the financial world, people often suffer from absorbing too much information. Rather than education, the result is becoming overwhelmed. Hopefully, with this help of this guide, you can tune out the noise and understand what really matters in the realm of credit score ratings.