Which best explains what a credit score represents
When it comes to understanding what a credit score represents, it is essential to look at the numerical value you will receive from one of these reports. This number will be based on a large number of different factors. One such factor is the amount of debt you have incurred. The longer this debt has been outstanding, the lower your score will be. This means that the only way to repair your score in the future is to reduce the amount of debt you have by settling it or paying it off completely. A good credit score can help you secure a loan at lower interest rates and this will ultimately reduce your outgoings.
- A credit score is a three-digit number designed to represent the likelihood you will pay your bills on time
- There are many different credit scores and scoring models
- Higher credit scores generally result in more favorable credit terms
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time.
Credit scores are calculated using information in your credit reports, including your payment history, the amount of debt you have, and the length of your credit history. Higher scores mean you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating a request for credit.
Here is a general look at credit score ranges:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
There are many different scoring models, and some use other data, such as your income, when calculating credit scores. Credit scores are used by potential lenders and creditors, such as banks, credit card companies or car dealerships, as one factor when deciding whether to offer you credit, like a loan or a credit card.
Why are credit scores important?
Why is it important to strive for a higher credit score? Simply put, those with higher credit scores generally receive more favorable credit terms, which may translate into lower payments and less paid in interest over the life of the account.
Remember, though, that everyone’s financial and credit situation is different. Different lenders may also have different criteria when it comes to granting credit, which may include information such as your income.
Another factor that can affect how your score is calculated is the amount of available borrowing. The higher your level of borrowing, the lower your score will be. Therefore, it is important that you do not take up too much borrowing and always opt for smaller sums of borrowing to reduce your risk and give yourself peace of mind.
Another factor considered by those who work out how a credit score is determined is the level of delinquency that your credit report shows. If you have a history of late payments and over limits, this will have a negative impact. However, a high credit score indicates that you were able to maintain regular payments and that you have not defaulted on any debts in the recent past. Hence, you will be regarded as a more responsible borrower and this will give you a better chance of securing a loan if you apply for one.
Repay your debts
When you are working out how likely you are to repay your debts, it is also important to look at how long you have held your current position. Lenders do not like to see people lingering on loans for very long. Therefore, if you find yourself in a similar situation in a year’s time, then lenders will be less likely to offer you a loan. Also, if you have been without a job for a long period of time, then lenders will also be reluctant to offer you a loan. If you are able to get a job with a company for a minimum period of time, then your credit score will improve as the company marks you down for being in a difficult financial situation.
How much money you currently owe
When you are working out which best explains what a credit score represents, it is also important to consider how much money you currently owe. If you only owe a small amount of money, then lenders will be less concerned about your borrowing capabilities and your borrowing history may actually affect your credit score rather than your ability to pay your debts. If you have a large amount of debt then you are more likely to be defaulted on or sued. This means that your creditors will want to make sure they have the right to take legal action against you. So, it is important to work hard to keep up with your current level of borrowing before lenders decide to delve into your financial situation.
Your income is another number that represents, how much you can potentially borrow and, also how likely you are to be able to repay this borrowing. For example, a lower amount of income (which would include bonuses and hourly rates) represents higher borrowing capacity. Higher annual salaries represents lower borrowing capacity. Therefore, paying off a large number of high interest credit cards would reflect a much better numerical rating, showing that you are more likely to manage your debt better.
Good credit scores and poor credit scores
Finally, there is a difference between good credit scores and poor credit scores. A good credit score reflects your ability to repay debts in full and within the agreed time period. Poor credit scores reflect the fact that you have a history of late repayments and default payments and/or a bankruptcy filing in the past. Both these represent bad behaviour when it comes to paying debts and, therefore, reflect very poorly on your ability to manage your debt in the future.
Determine your APR
These factors are used by lenders to work out how likely you are to repay a loan and, therefore, determine your APR. However, this APR is determined after taking into account all the relevant factors that relate to your individual circumstances. For example, if you have very poor credit scores and are likely to be unable to pay back the loan, then your APR will be very high. Likewise, if you have a very good credit score and are likely to be able to repay the loan in full each month, then your APR may be lower.