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Credit Score Scale Explained!

If you are thinking of applying for a loan, it will be a good idea to first check where you stand on the credit score scale.

Why? Because knowing where you are on the scale can have a huge effect on the interest rates you’ll get.

Generally speaking, the higher your score is, the lower the risk is to the lenders and the easier you’ll obtain a loan of any sort. While a low score could result in much higher interest rates or having your application rejected outright.

Understanding credit score range

As people are becoming increasingly dependent on credit, neglecting the importance of credit score can be very costly. This magical number says a lot about your credit worthiness. It can either save you money or cost you money.

In fact, getting loan of any kind is almost impossible nowadays without a decent score. That is why it is important to understand the credit score scale, what is considered a good credit score and where you are on the scale.

I have seen someone ignorant of his credit score and was rejected for a loan application for the umpteenth time as no lender was willing to take the risk to loan any amount to him. And even if he were to get the loan, the interest is likely to be significantly higher as the lenders will want to offset the risk of lending due to his poor credit score. See the true cost of a low credit score.

In laymen term…

Credit score is a 3-digit rating that shows your likelihood to repay the loan you borrow in a definite length of time. Before giving out the loan, your lenders request a credit report from one of the three credit reporting agencies such as Experian (formerly known as TRW).

This credit report reveals your personal information, financial history and of course how well you manage your debts and finance in the past (see also TRW credit report). Basically it implies how wisely you have used credit in the past and how likely you’ll continue to do so in the future.

Your credit score is computed based on a subset of information within your credit report which a lending institution will use along with other factors when determining the risk factor when you apply for a credit card or request for a loan.

Although by law, you’re entitled to receive a free copy of your credit report annually, this free report will not reveal your actual credit score. In order to review your actual score to see where you are on the scale you will have to pay a fee to obtain your score.

Crucial issues that largely impact your credit score

In general, how excellent your credit score depends on the following factors, though some carry more weight than the others

1. Payment History – 35%
2. Total Amounts Owed – 30%
3. Length of Credit History – 15%
4. New Credit – 10%
5. Type of Credit in Use – 10%

Decoding credit score scale

Note that your credit score may be different from one institution to another as the scoring system used by all three credit bureaus are different. For instance:

  • Equifax : Fair Isaac Scoring Model
  • Experian : PLUS Score
  • Trans Union : Classic FICO Risk Score

Till recently the three leading bureaus above have agreed on using a collaborated new scoring model called Vantage Score which uses a number range (501 to 990), which is different from FICO score (that uses a scale of between 300 to 850). Just like a student, you’ll be given A-F score. A is the best while F the worst.

Here’s the letter grade and its related score range

Vantage Score FICO Score Range
A 901 – 990 720 – 850 Best Credit or Prime Credit
B 801 – 900 700 – 719 Good Credit
C 701 – 800 675 – 699 Marginal Credit
D 601 – 700 620 – 674 Sub-Prime Credit
F 501 – 600 560 – 619 Poor Credit

While a little competition is a good thing for the consumers, the most widely used scoring platform is still the classic FICO. Whether it will arise further confusion or otherwise, Vantage Score will likely coexist alongside the FICO Score for many years to come. See more comparison between Vantage vs FICO Score.

That said, if your credit score based on FICO scoring model is somewhere around 700, you simply have nothing to worry about because it is generally assumed that a decent credit score ranges from 660 to 700 – given the fact that the current median score in the U.S is 723.1

Otherwise, it always pays to improve your score and move up the rank within the scale before applying for a loan. Remember, any financial decision you make today may affect your credit tomorrow.

References:
  1. National Average Credit Score []

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