Whether you want to buy that house you have had your eye on all year or finally buy your dream car, you will likely need a loan to finance the purchase. Trouble is, your credit history isn’t very strong. In fact, maybe it’s bad. Maybe you are carrying too much debt or you have a history of late payments. But to get a loan your credit score doesn’t need to be top-notch. The difference is that if your score is low, your interest rate will be high.
Good vs. Bad
Credit scores range from 300 to 850. The higher your score, the better your chances to get approved for a loan at favorable terms. According to a publication by the Consumer Federation of America and Fair Isaac Corp. – the developer of the FICO credit score – most Americans are in the 600-700 range. A good score is above 700, as lenders see that as an indication of strong financial health.
Scores at 720 or above are considered good credit and enable you to get the most attractive loans, according to CNN. Lenders will offer competitive interest rates to people with good credit. Some lenders will accept those with credit scores of 680. For buying a home, The Dough Roller states that a FICO credit score under 620 is considered sub-prime and it would be difficult to get a loan at that number. If you are offered a loan, however, you will not be offered the best interest rate.
Components of Your Score
Your FICO score is made up of five basic components. Two, however, make up almost of two-thirds of your score. Your payment history makes up 35 percent of your score, while the amount you owe lenders is another 30 percent. Credit history makes up 15 percent of your score. New credit accounts and credit applications for credit account for 10 percent of your score. Other factors, such as having a mix of credit types, make up the remaining 10 percent.
How to Improve
Improving your credit score can take time. The first thing to do is review your credit report to ensure everything is accurate. You can visit Annual Credit Report to request a free copy from the three credit reporting companies -- Equifax, TransUnion and Experian. If there is an error, report it immediately to boost your score. Stop making late payments. Showing you can pay your bills on time can boost your credit score significantly since it makes up 35 percent of your score. Paying down your debt is another fast way to improve your score since it weighs so heavily on the outcome.
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