Do you know what your credit score really means? What hides behind the numbers, also called points? What's better: 570 or 780 points? Most Americans have very basic understanding of the credit score issues. And only when they slide to poor or bad credit category, they develop some interest and try to learn more.
Here's an explanation of the fundamentals, critial to your financial standing.
Banks and financial institutions use the credit score to evaluate the risk of having you as a borrower. The higher your score, the lower their perceived risk.
So, whenever you apply for a home loan, car loan or just a cash advance, the lender looks at your credit score. If your score is low, the lending institution will have to lift the interest payable on the loan, to cover their increased risk, that you may default. Or, when your score falls below an acceptable level, they'll refuse your application.
Now, what score are good, better or bad? Here's the list:
781-850 - Low Risk Borrower
741-780 - Medium to Low Risk
691-740 - Medium Risk
621-690 - Medium to High Risk
620 and below - High Risk also called "sub-prime" borrower.
The higher the points, the more valuable a customer you're deemed to be. Bank wants your business particularly if you're above 780 points.
If you're below 620 (some people can be as low as 300 points, which is the lowest score), your chance of having the loan application approved are minimal, or none in case of more conservative lending practices.
From the above, you'll understand how important it is to care about your credit score. Otherwise, you'll pay inflated interest rates, and your loan will cause an extra burden on your budget.
