Lenders use your credit score as the leading factor in determining whether you are a good candidate for a loan. Strong credit scores are critical for everything from availing loans and credit cards at good interest rates to getting better loan amounts all with no trouble. To adequately understand why credit scores are so important, we need to begin at the very beginning.
What Do We Mean By Credit Score?
A credit score is a three-digit number that is derived from the information that appears on your credit report to assess your creditworthiness. It indicates how likely you are to repay your loan in a timely manner. The information on your credit report is used to calculate your credit score. Consumer reporting agencies (CRAs) like the Experian, TransUnion, and Equifax compile your credit history and sell it to lenders, employers and other entities. Many lenders use FICO Scores, a credit score algorithm developed by Fair Isaac Corporation. You can get the FICO scores based on your TransUnion, Experian or Equifax credit reports all of which may vary slightly. It is, therefore, advisable to review each of the reports from the big three, so you can keep up with the finer details influencing your credit score.
The primary factors that determine your credit score include payment history, the total owed, type of debt, applications for credit and length of time using credit. According to creditkarma.com, a score of 720 or above is considered good credit while that above 750 is excellent credit. Scores below 660 can result in higher rates, fees or more sizeable down payment mandates.
Why Does it Matter?
Your credit score plays a significant role in your financial journey. In today’s marketplace, it is important for entrepreneurs to manage their credit scores as it can to a large extent affect one’s ability to secure a personal loan, payday loan, business loan or other types of financing.
It determines whether or not you’re approved for credit
The majority of the lenders, especially in financial institutions review their applicants’ credit scores as part of their decision on whether or not to grant a loan. Most business startups require a good amount of cash which is not always available. In such cases, you may need to obtain a small business loan, and the key to that is having a good credit to qualify for the loan. When you and your business have a good credit profile, you have a better chance of securing financing whenever you need it.
Better credit scores usually lead to better rates
Any lender will like to gauge how much they risk when they lend money to you. Higher credit scores qualify you for better interest rates and loan terms on any loans you seek helping you to save thousands of dollars in interest on future loans. A high-interest rate can result in large monthly payments, which can become unaffordable and cause you to make late payments or to miss payments completely making your credit score even worse.
It helps you prepare for the future
Being aware of your credit and your credit score is critical, especially since you can harm your credit without even being aware of it. If you are not monitoring your credit scores, you may not be in a position to know when there is an issue until it has wrecked your credit. Reviewing your report can help you better understand the state of your finances and warn you when things start to head in the wrong direction so you can take a little course of correction. This way, you will be able to manage your resources better even in the long run.