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To buy a car or even get a cell phone, a good credit score is necessary. Depending on factors like the type of loan or the size of a deposit, the exact requirements may vary. In a credit-based world, achieving a high credit score is the best way for modern consumers can show financial institutions that they are credit worthy. In addition to showing financial institutions a history of credit worthiness, good credit may be necessary for renting an apartment, getting a job or achieving the best price on car insurance.
How a Credit Score Works
In general, people refer to a FICO score when they are talking about their credit score. There are essentially three main credit reporting bureaus that each create a version of this rating. One person's credit score may vary between TransUnion, Equifax and Experian. Although the reported score may vary slightly, it will generally not vary by more than a few points.
For all of these credit bureaus, the highest possible score is normally an 850 and the lowest possible score is a 300. To achieve a perfect 850, a consumer would have to have the perfect balance of debt, a long credit history and no negative marks on their report. Since this is close to impossible for most people, financial institutions do not require a perfect 850. If the consumer has a 760 or better, they will qualify for the best rates and credit options.
The General Guidelines
In most situations, a 750 or higher is considered excellent credit. While 700 to 749 is marked as good credit, a 650 to 699 is considered just fair credit. Anything lower than these levels is considered poor or bad credit. If the consumer has a rating below 600, their credit will qualify them for fewer financial offers and require them to pay a higher interest rate.
Even though these guidelines are used by most companies, it does not mean that someone with a 550 is automatically denied a loan. Depending on the economy and the consumer's income, lenders may still offer options. These loans will generally be charged at a higher rate than the interest rate offered to someone with good or excellent credit. Over the course of a 30-year mortgage for $300,000, the interest rate between bad or excellent credit can lead to a $90,000 difference in the amount a consumer actually pays.
Credit Scores Change Over Time
Someone who has terrible credit today can always improve their credit over the future. Often, doing things like paying down on debt or starting a line of credit can boost an individual's score. Even without doing anything, a consumer's credit score is likely to improve over time. For someone between the ages of 25 and 34, credit scores average about 628. From age 45 to 54, the average score is 647. Meanwhile, individuals older than 55 have an average score of 697. Since the duration of a credit history is a factor, it makes sense that an older individual with a longer credit history would have a higher score.
Why a Credit Score Matters
Having a high credit score is about more than just getting a credit card. With a higher score, it is easier to get a job, obtain a loan and rent an apartment. For individuals with a high credit score, the following things are easier:
Getting a Job: Many employers will look at an individual's credit score before they hire them. Although this practice has been outlawed in some states, it is still a common occurrence. Especially in finance or cash handling industries, employers are unwilling to hire an employee who has a poor credit history. Even in other industries, an employer may view a poor credit history as a sign that the individual is not responsible enough to employ them.
Renting an Apartment: Landlords only want to rent to tenant's who can pay rent consistently. Due to this, a landlord will normally look at the renter's credit score and income before they choose to lease the apartment.
Loans: Credit cards and loans can be notoriously difficult to get with a poor credit. Even if someone is able to get a loan, they will most likely have a higher interest rate if they have poor credit. Additionally, they may have to get a cosigner, give a larger deposit or use something as collateral.
Utilities: When moving into a new home or apartment, one of the first steps is to get utilities set up. Individuals with good credit can easily set up their utilities, but utility companies will normally require a deposit before setting up an account for an individual with bad credit.
Achieving a Lower Insurance Rate: Car and property insurance can be found for much cheaper if individual's have good credit. Statistically, someone with bad credit is more likely to file a claim. Although Hawaii, California and Maryland have banned insurance companies from using credit scores to vet customers, it is legal in every other state.
Having good credit is essential for getting a loan, renting an apartment and finding a good job. Although a higher score makes things easier, it is still possible to get a loan with poor credit. Technically, anyone with a score of 500 can receive a FHA loan. Despite this, most FHA loans go to consumers with a score that is higher than 620.
Getting a Better Credit Score
Even with a low credit score, it is still possible to qualify for a home loan, credit card or car loan. To get the best rates, consumers have to increase their credit scores. This starts by running a credit check. The three major credit reporting bureaus offer a free credit check annually, and there are several companies that provide credit scores for free. Once the individual knows what their credit score is, they can begin to improve their rating.