Credit scores are a very important factor when trying to obtain a loan or any type financing for a truck, trailer, car or home. Many do not understand what a credit score is or how it works. A better understanding will help you reach your financial goals in the future.
A credit score is a reflection of your financial well-being at a certain point in time. It tells lenders whether you are high or low risk to loan money to. The higher the credit score, the lower the risk to the lender. The credit score changes with circumstances and different points of our lives. You want to be in the best position with the highest score possible so you can obtain lower interest rates and more options.
Credit scores range from 300-900. Each lender determines their minimum score to borrow money. Your credit score will be a big factor in the interest rate you will pay. A low score is higher risk and you will pay higher rates. The scoring is divided as follows:
300-559 – Poor Score
560-659 – Fair Score
660-724- Good Score
725-759-Very Good Score
760 + -Excellent Score
A credit score is not the only factor considered when borrowing money. It is one of many factors such as; income, up to date tax returns, job stability of several years and bank statements. But your credit score needs to be a certain pre-determined minimum set by the bank before the other factors will be considered.
You may want to try to improve your credit score. To make improvements, the first and most simple thing you can do is pay all your bills on time and never miss a payment. Excuses like “I didn’t get my bill.” Or “I was away on vacation.” Do not work for any bank or lender. It is your own fault if you missed a payment and you are solely responsible for your own actions.
Try to pay your bill in full if you can instead of a minimum payment. It not only saves you paying extra interest, but it also shows the lender you are paying things off rapidly. Try to keep your credit card balances well below the maximum limit. Carrying high balances and going over your limit affect your credit score. If you are carrying a high balance for a long period of time, your credit score begins to drop because you have shown that you have possibly spent more than you earn and possibly cannot pay the card off.
When applying for credit, try to go to only one place, such as a broker or your main bank. Having multiple enquiries can bring your credit score down. It also infuriates lenders that you are shopping around for credit. Multiple enquiries can also show you may have been declined multiple times. So try to go to only one place for a loan if you can.
Another important factor is not having enough credit. I often see new immigrants who apply for a loan but they have very little credit history because they are new to the country. It is important to apply for credit as soon as possible so you can start building your history. A bank cannot give you a $100,000 loan when you only have a $500 Visa card limit that you just got 2 months ago. You need credit to get credit, so get it as soon as you can.
We cannot predict the future, and often circumstances can change. You might lose your job or get sick. If this happens it is very important to maintain your credit. Having savings for several months of all your major payments can cover for the unexpected or have insurance such as disability or critical illness to cover your payments if you are unable to work. The bank doesn’t care if you broke your leg and can’t work, they just want their money. So build your credit and then maintain it by taking precautions to protect it. A good credit score will help you immensely so keep it intact.
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