The question of what is a good credit score bothers most people, especially those looking to take a loan. This is because of the common knowledge that lenders, banks, credit card companies, and other financial service providers use your credit worthiness to deny or approve a loan.
For that reason, this article provides a detailed account of what is a good credit score, the advantages of a good credit score, and the disadvantages of a credit score with the aim of helping you understand how credit score might affect your financial life. Read through it to expand your financial knowledge.
What Is a Good Credit Score
According to Credit Karma, the use of credit score dates back to the late 1900s when credit companies like Equifax, TransUnion, and Fair Isaac Corporation, stepped out to offer credit-reporting services to financial organizations that were in need of a client’s financial information.
Later on, the Congress passed the Fair Credit Reporting Act to curb the shortcomings that existed in the traditional credit reporting system. In 2003, the Congress amended the Fair Credit Act to the more defined credit reporting system that exists today.
So, what is a good credit score? Currently, the three national credit bureaus use a FICO Scale that ranges from 300- 850 to determine your credit score. Based on the FICO scale, a credit score ranging between 300- 579 is very poor and that ranging between 580- 669 is fair. According to Experian, a good credit score should be above 670.
As stated by My Fico, a credit score is determined by factors like your payment history, the number of credit accounts, debt, financial records like bankruptcy and liens, and the length of your credit history.
Credit scores are mainly used by financial institutions like banks, credit card companies, mortgage lenders, and many other financial service providers. However, landlords, employers, utility companies, and car dealerships can also use your credit score when delivering certain services on credit.
The financial organizations, utility companies, car dealerships use the credit score as a statistical determinant to assess one’s credit risk. For instance, people with a good credit score are known to manage their finances carefully, and they pay their bills or credit on time.
On the other hand, individuals with a poor credit score are considered risky borrowers who don’t know how to manage their finances and their chances of defaulting payments are high.
Advantages of a Good Credit Score and Disadvantages of a Poor Credit Score
Knowing how your credit score affects your life is crucial if you want to know what is a good credit score. For instance, people with a good credit score will quickly secure loans to finance their businesses, studies, or buy homes or cars. Also, these individuals with a good credit score will find it easy to rent an apartment, find a job, and make major purchases.
On the contrary, people with a weak credit score are likely to face life challenges like difficulty to secure a loan, rent an apartment, and secure a job or contract, among other financial challenges.
Advantages of a Good Credit Score
1. Easy loan approval
Lenders and other financial service providers are always ready to lend people with a good credit score. This is since they are likely to pay their loan as stipulated. As such, you can take advantage of the easy loan approvals to finance your investment, studies, build an apartment, or even purchase your dream car. Besides the ease of getting a loan, a good credit score may qualify you for a higher loan limit.
2. Easy approval for a rental apartment
Your credit worthiness is one of the factors that property owners use in tenant screening. For this reason, people with a good credit score have a good chance of securing a rental apartment quickly. Because a good credit depicts that you are likely to pay your rent and other associated bills on time.
3. Beneficial treatment from financial institutions
Most lenders and insurance providers use your credit score when determining interest rates and insurance premiums. As a rule, people with a good credit score are likely to secure a loan at a lower interest rate. Or a better insurance deal as compared to those with a poor credit score.
4. You can get a job easily
Employers may request to see your credit score as part of the recruitment process. And bad credit issues like bankruptcy, liens, and late payments are red flags that can stop you from being employed. This is because such bad credit issues can make the employer think you’re untrustworthy with money.
5. No security deposits
Utility companies, credit card companies, and even property owners may ask people with a weak credit score to pay a security deposit as an assurance against defaulted payments. However, a good credit score may save you from paying this upfront security deposits.
Disadvantages of a Weak Credit Score
1. Frequent loan refusal
Most creditors will turn down your loan application if your credit is poor. If you are lucky, some lenders will approve your credit. But they will charge you a higher interest rate than they charge clients with an excellent credit score.
2. Utility companies ask for a security deposit before they deliver services
Almost all utility companies run a credit check before they offer service. If they find out that your credit is weak, the utility companies will ask you to pay a security deposit. They will ask for it before they deliver any service you requested.
3. Difficulty in occupying upper management positions
Employers looking for a candidate to occupy a top managerial position will check your credit history before they consider you for the post. Such employers are likely to turn down your application on the basis that you are financially irresponsible. And that your financial issues are likely to affect your job performance.
4. Difficulty in starting a business or other investment projects
Most entrepreneurs rely on financing to start, run and expand a business or any investment project. Regardless of how attractive a business idea seems, most lenders won’t be at peace to finance you if your credit score is weak. That is why you have to know what is a good credit score, so you can gain the trust of your lenders easily.
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5. High insurance premiums
Like other financial institutions, insurance companies use your credit score to determine your insurance premium. If your credit score is weak, an insurance company will charge you a high premium. This is because they believe that people with a poor credit score have a tendency of filling more claims than those with a good credit score.
Most creditors use your credit score to approve or deny your loan application. For this reason, people whose FICO score is above 670 receive quick loan approvals. They receive loans at a lower interest rate, and they will secure rental apartments easily. On the other hand, those with a weak credit score find it hard to obtain a loan, find a rental apartment, or even get a job. It is our hope that we have answered your what is a good credit score question. Was the article helpful? Feel free to share your thoughts to help us improve it.