Many people depend on loans to improve the quality of their lives, complete various projects, or purchase items that one could otherwise not afford. Many factors come in when accessing loans/mortgages or any financial assistance from a financial institution. One of these is the credit score. A credit score is a numerical representation based on a preset formula that represents the likelihood of one repaying what they borrowed at the agreed time. Usually referred to as FICO score, developed by Fair Isaac Corporation, it ranges from 300 – 850. The variables used to calculate your credit score include your payment history, amounts owed at the moment, duration of your credit history, the forms of credit used and the latest credit inquiries.
A good credit score is any score north of the 700 mark. Such a figure sits well with majority of the lenders. When you apply for a loan or mortgage, they look at your credit score to determine your credit history. From your previous credit behaviour, they can then determine the amount to lend you, the interest rate to charge, and the payback duration. A good credit score will save you a lot of money on rates of interests. It also enables you to access more money and enjoy longer payback duration. If seeking a mortgage, a high score can allow you to access a loan without needing a down payment or mortgage insurance. This is because clients with good credit score are considered low risk by the financial institutions.
A bad credit score (below 600) on the other hand make acquisition of a loan or mortgage very difficult. The lender usually considers you, based on your credit history, a high risk venture. This usually translates to lower amount of loan given, higher interest rates and shorter payment period. It also means that the mortgage provider will expect you to forward a larger down payment on your mortgage; it also requires you to apply for mortgage insurance since the probability of you defaulting is high as evidenced by your credit history. All this translates to more expenses on your side. The score will determine the total of your mortgage loan and the rate that you will be offered. Therefore, when applying for a mortgage, make sure that your credit score is in order.
However, while credit score is vital there are other factors that banks consider when lending you money or a mortgage loan. These include your earnings, outstanding debts and debt-to- income ratio. However, to access better terms, it is advisable that you check your credit score and then improve it if necessary. The scores are available from various agencies. After getting your scores, evaluate your position then seek assistance from financial advisers on how to fix it and improve your financial standing.