Consumers sometimes take the “you either have it, or you don’t” approach to measuring their credit.
With a good credit score, they feel confident about their ability to finance a large purchase, such as real estate property. If the score is less than ideal, then it’s normal for a lot of people to get down on themselves and feel credit inadequate.
Credit ratings aren’t as cut and dry.
High credit is a combination of factors, such as a good record of on-time payments and a favorable credit utilization ratio. Yet, it doesn’t always pay off to aim high. Read on to learn more about what exactly is a good credit score and how a little credit score maneuvering can unleash your full financial potential.
Credit is about debt
People tend to look at credit as a measure of responsibility. That’s partially correct. But what a credit score is really about is how well a person can manage debt over time.
Lenders pay particular attention to a person’s debt level to determine credit approvals and the loan’s interest rate. Borrowers’ spending habits, savings and overall bank balance are not a part of the equation.
How no credit works
A person with no active credit probably hasn’t borrowed any money in several years; never opened an account and hasn’t recently applied for a credit card. This type of borrower is less likely to get loan approval since it’ll be more difficult for the lender to gauge credit risk.
An indeterminable credit score, however, isn’t the worst thing in the world and can be better than a poor credit score.
What is a bad score?
A score between 300-580.
A history of money mismanagement will lead to an unfavorable credit score. Poor habits such as routinely missing payments or letting missed payments escalate to collections will lead to a poor score, financially chaining consumers to a large ball of bad debt.
When consumers engage in risky credit behavior, their score may begin to drop. And when they apply for a new loan, creditors will hesitate and label them as too risky for approval. This could be a huge blow, especially if you’re thinking about buying a home.
People with less-than-perfect scores can get approved for a loan, but it can come at a high price. Some lenders will approve a loan, but they will attach it with a higher interest rate, which adds up the costs as the loan matures.
So, sometimes aiming for zero can be a whole lot better than having a mediocre credit score. A “zero” credit score means you’re free of debt and haven’t made any major credit missteps over the years. If you find yourself on the other side of zero, keep up with payments, chip away at balances and bring down the utilization rate so you can enjoy financial freedom one way or the other.
If you have any questions about how credit impacts loan eligibility, contact us today!