Credit Scores: The Importance, Importance, and Impact of Credit Scores on Loans and Jobs
A credit score is essential for any individual to build a solid financial profile. Because of your good credit rating, you can get the credit products you need immediately. You are more likely to be granted credit as a result of your efforts to improve your credit score.
Here we discuss everything you need to know about credit scores and how they can affect your future, your ability to obtain credit, and your job opportunities.
What are credit scores?
A credit-worthiness determines your credit risk, or how likely you are to pay off your loans on time, and is a three-digit number between 300 and 850.
Your creditworthiness is determined by considering your payment history, the total amount you owe, and the length of your credit history. Higher scores show that you have previously demonstrated responsible lending behavior, which can inspire more confidence from prospective lenders and lenders when evaluating a loan request.
Lenders, including banks and credit card companies, use credit ratings to determine the risk of lending to consumers and reduce bad debt losses. Lenders use credit scores to decide whether an applicant is eligible for a loan, the interest rate, and the credit limits. Lenders also use credit scores to determine which customers are most likely to generate income.
Banks are not the only institutions that use credit checks. Other companies such as cell phone providers, insurers, rental companies, and government agencies can use the same strategies. Alternative data sources are used by digital finance organizations such as online lenders to determine a borrower’s creditworthiness.
How are credit scores calculated?
Credit scores are calculated based on these five factors:
- About 35% of your credit score is based on your payment history. It represents your ability to pay bills on time, frequency of missed payments, number of days you pay bills after the due date, and frequency of late payments.
- How much you owe accounts for about 30% of your credit score. Factors such as the total amount owed, the type and number of accounts you have, and the ratio of your debt to available credit come into play. Paying your bills on time and in small amounts can boost your credit score, but larger balances and maxed-out credit cards will lower it.
- The length of your credit history is about 15% of your credit score. The longer you have made payments on time, the better your credit rating will be. When considering credit history, credit scoring models often consider the average age of your loan. Because of this, you should think about maintaining open and active accounts.
- Your account type accounts for about 10% of your credit score. Various accounts like credit cards, installment loans, and other loans can help you improve your credit score.
- Recent activity on your account takes up the last 10% of your credit score. Recent account openings or applications for new accounts may indicate likely financial difficulties and lower your score.
If you have one below 690 credits, you may need to consider an increase to increase your chances of getting a loan. Even if you don’t know your current points balance, you can do this Calculate your credit score Use any available online tool or visit your bank for more information.
Building and maintaining good credit is a cornerstone of a successful financial life. Money Girl, Experian’s Laura Adams and Rod Griffin discuss the money girl podcast.
Importance of a good credit score
A credit score above 650 is considered fair. There are numerous benefits of having good credit and we will discuss some of them below;
Low interest rate
One of the fees associated with taking out a loan is the interest rate, and you’ll often get an interest rate that directly correlates to your credit score. There is a high probability that you will qualify for this lower interest rates and pay less financing fees on credit card balances and loans when you have good credit.
Easier loan approvals
Borrowers with poor credit ratings often avoid applying for new credit cards or loans due to repeated rejections. A good credit rating does not guarantee acceptance, as the lenders still take your income and debt into account. However, a good credit score increases your likelihood of getting a new loan. In other words, you can confidently apply for a loan or credit card. Although always one Loan with bad credit possible, you should pay attention to a high credit rating.
Easier approval for a higher limit
Your credit rating and salary determine your ability to borrow money. Because you’ve demonstrated that you can pay back what you borrowed on time, banks are more willing to lend you additional money if you have a strong credit history. If you have a low credit score, you may still be accepted for some loans, but the amount will be less.
Easier approval for rentals and purchases
Many landlords now use credit scores during the tenant screening process. Bad credit can seriously affect your chances of renting an apartment, especially if it’s caused by a previous eviction or unpaid rent. Good credit means you avoid the time and stress of looking for a landlord who accepts tenants with bad credit.
Effects of bad credit on loans and jobs
With bad credit, you might miss out on some credit and even job opportunities. Here are a few downsides to bad credit;
Higher interest rates on loans and credit cards
Your credit score indicates your likelihood of defaulting on a credit card or loan agreement. You are a riskier borrower than someone with a higher credit rating. By charging you a higher interest rate, creditors and lenders make you pay for that risk.
If you get a loan with a bad credit rating, you end up paying more interest than if you had a better credit rating.
You might miss out on some career opportunities.
Employers in most states can obtain consumer credit reports when deciding who to hire, promote, or reassign. This is especially true if the position has significant financial obligations.
Your employer will not see your exact credit score, but they can access your credit report and view details of your accounts with your signed permission. If this is found, it may affect their decision to hire you.
To learn more about credit scores â and why yours may have gone down â watch Episode 599 of the money girl podcast below.