What is a FICO score?
It is a numerically simplified summary of your credit card report that was introduced by the fair Isaac Corporation in 1989. It is used by 90% of lenders in United States as a standard to determine the likelihood of a debtor repaying a loan. Your FICO score not only determines your creditworthiness but also affects the amount you receive, the duration of the loan, and the interest rate.
Why FICO score matters
- Majority of lenders use it to determine credit your worthiness
- A high FICO score means a high loan amount
- A high FICO score means low interest rates
What is a good/strong FICO score?
FICO scores range from 300 to 850. Below is a list of FICO score ranges, and how they influence your creditworthiness.
- Below 580
This is a poor score. It is way below the average score. It depicts you as a risky borrower. The chances of securing a loan with this score are very low.
- 580 to 669
This score is fair. Although it is below the average score, few lenders might consider approving your loan.
- 670 to 739
Most lenders consider this as a good score since it is above average.
- 740 to 839
This score is very good; it demonstrates that you are a dependable borrower.
- Above 800
This is a strong and exceptional score. It demonstrates to lenders that you are not only dependable, but also very responsible.
A FICO score of 704 is considered as the average score for US consumers. Therefore, any score above average is strong.
Benefits of having a strong FICO score
1) You increase the chances for credit card and loan approval
When you have a high FICO score, you increase the chances of loan approval compared to a person with a low score. This is because lenders view you as a dependable and responsible person in matters of finances. Although there are other factors like income and debt, your fico scores give you an upper hand making you more confident while applying for new credit cards.
In addition, lenders are willing to let you increase your loan limit because your credit history shows that you pay on time. While people with an average score may still get approval, their loan amount will be limited.
2) You can make more savings due to low interest rates
Your interest rate is always proportional to your credit score. When you have a good credit score, you qualify for the best interests. This means that you will pay lower charges hence pay off the loan faster.
This also gives you the advantage to negotiate for a lower interest rate since there will be more than one offer from other companies. With a low credit score, you are at the mercy of the lender and therefore you do not have any bargaining advantage.
3) You will have better terms and availability on loan products
When you have a good credit score, lenders will always want to lend you. You will therefore have access to most loans and credit card products that are available. With such a limitless access, you will compare the rates more effectively. When financing big purchases borrowers with a good credit score work with the best terms.
4) Easier approval for rental houses and apartments
Due the increase in fraud cases, property owners, and rental companies use a tenant’s credit score to determine whether they are trustworthy. If you have a high credit score, you are more likely to be approved. Tenants with a poor score, especially caused by evictions or outstanding rental balances are not approved. With a good score, you save time and energy spent searching for a lenient property owner.
5) You can bypass security deposits on utilities or services
With a good credit score, you do not have to settle for those pay as you go plans since cell phone provider’s trust you enough to give you a contract. You may even receive discounted prices in purchases by signing a contract. With a bad credit score, you will have to pay extra in order to establish yourself with the provider.
When you have a good credit score, you do not have to pay a security deposit in order to transfer a service /establish it in your name. Such a privilege comes in handy when natural calamities or disasters strike.
6) Better car insurance rates
Although insurance companies cannot turn down people with poor credit scores, they are penalized with a higher insurance rate. Insurance companies use FICO scores to develop an insurance risk score. With a high credit score, you will pay less compared to applicants with a poor FICO score.
7) You have a chance to opt for a risk based lender
A risk-based lender is similar to peer-to-peer loans where your interest rate is entirely based on your credit score. A risk-based lender awards you stronger interest rates depending on your credit rating. With a strong credit score, you receive low rates for personal loans.
Tips to help you obtain a strong FICO score
- Always pay your loans on time
- Reduce your debt to income ratio
- Correct existing errors on your credit report
- Avoid closing unused credit cards
- Open new credit accounts only when necessary
From the above discussion, it is clear that FICO scores influences many things. This ranges from insurance, loans, and rentals among others. Having a high score puts you at a competitive advantage while having average scores leaves you at the mercy of your lenders.