One small three-digit number is responsible for many of your future financial investments. We decide your creditworthiness based on your FICO score which is one method of calculating your credit score. You should always be aware of your FICO score and whether you should make improvements to your credit if you want to apply for a loan.
Know what a FICO score is
A FICO score is a credit score determined by a scoring model developed by the Fair Isaac Corporation, according to the National Association of Realtors. A score ranges between 300 and 850, and the higher your score is, the better. If your FICO score is lower, we may consider you a high-risk borrower.
In addition, if you are approved for a loan and have a lower credit score, discuss options available to you to avoid a potentially higher interest rate. It is crucial to make yourself aware of your FICO score and bring your number up if necessary. A high credit score can ultimately save you from additional costs.
According to the Fifth Annual Credit Study released by Experian, the average credit score in the U.S. for 2014 stood at 666. This was two points down from the previous year. Know the average credit score and speak with your financial advisor regarding ways to improve your credit score if your number dips below the average or even if you just want to improve your score in general.
According to MyFICO, this model determines your creditworthiness based on five categories. Listed from least impactful to most, these include:
- Types of credit used
- New credit
- Length of credit history
- Amounts owed
- Payment history
Be aware of which elements have the most profound effect on your FICO score. If you are attempting to increase your creditworthiness, knowing payment history and the volume of debt you accumulate account for 65 percent of your FICO store can help you determine what changes to your financial habits will help raise your score.
How your credit score is used
Credit scores are required for a number of financial endeavors. According to Experian, a good FICO score is required when you are applying for a home or auto loan. In addition, a higher credit score can help you stand out to a landlord from a pool of individuals applying for an apartment.
Any time that you are applying to receive a loan, we need your credit score to determine how much of a risk you might bring as a borrower. We may also consider other factors, but credit history is the principal resource they typically rely on.
Improving your credit score is simple. You should consider setting up automatic payments for your bills if you have a difficult time remembering. Paying bills on time is crucial to improving your score. Consider even paying ahead of schedule, and if you are paying a credit card bill, think about doing twice a month.
Additional factors that may lead to a rejected loan request
If you are attempting to obtain a home or auto loan, you want to ensure your chances of approval are high. In addition to having an excellent FICO score, be aware of other elements that we could potentially view as a sore point in your loan application, according to Bankrate.
For example, if you cosign for another individual, you may inherit his or her creditworthiness as a result. Reconsider financial decisions you make if you are planning on making a larger purchase in the near future.
Knowing what your current credit score is, whether you need to improve it and what steps you should take to boost your number is essential. Remember the first step is educating yourself and becoming aware
For more information about smart ways to manage your finances, contact Landmark Bank.
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