Creditworthiness is whether someone can be trusted to pay back what they owe on time or not. However, creditworthiness involves such a wide range of factors that cannot be summed up using a single simple and straightforward measurement, which is why most businesses also use FICO, which is a convenient approximation of creditworthiness called the credit score.
Like its name suggests, a credit score is a rating between 300 and 800 assigned to a particular borrower by the three major credit reporting agencies in the United States, which are Equifax, Experian, and Trans Union.
The higher the credit score, the better that borrower’s chances of getting the financial product that they desire at an interest rate that they will find acceptable.
In contrast, a lower credit score will mean either no borrowing or an increased interest rate in order to make up for the increased risk from the lender choosing to take a chance on the borrower. As a result, a good credit score is a credit score that will get you what want instead of forcing you to settle for something else.
Fortunately for people who are interested in whether their credit score will let them borrow or not, there is a lot of information available on the calculation of the credit score.
In turn, this means that there is a lot of information available on potential ways to improve their credit score:
1. About 35 percent of a credit score is based on the borrower’s credit history, which means whether they have been making all of their payments on time. After all, past patterns of behavior is the best way to figure out how someone can be expected to behave in the future.
2. About 30 percent of a credit score is based on the sum that the borrower already owes to various lenders. This is important because the more debt that someone takes on, the more chance that said individual will have to default on one of them because of their more and more stretched finances.
3. About 15 percent of a credit score is based on the length of the borrower’s credit history, which is important because a longer credit history means more evidence, which in turn, means that a more reliable conclusion can be drawn from the evidence.
4. About 10 percent of a credit score is based on whether the borrower has been taking out a lot of new credit or not. Generally speaking, someone who attempts to borrow a long within a short period of time is seen as suspicious because it is a sign that they are in desperate need for money, which is not exactly encouraging for lenders that are expecting to be repaid in the fullness of time.
5. About 10 percent of a credit score is based on the kinds of financial products that the borrower has been using. The more kinds of financial products that have been used, the more sophisticated the borrower, which in turn, means the more that they are capable of managing their finances.
Different credit scores are needed for different kinds of mortgages. Furthermore, it should be noted that different market conditions can result in different credit score requirements as well.
Generally speaking, the absolute minimum for a mortgage is 500, but better mortgages will need higher credit scores. For example, most major lenders will approve FHA mortgage applications with a minimum of 580, while those same lenders will approve conventional mortgage applications with a minimum of 620.
However, please note that there is some wiggle room along these guidelines since some lenders do take other factors into consideration as well, though there is a serious limit on how flexible they are prepared to be.
If you are curious about the credit score needed for a particular kind of financial product, you should not hesitate to ask. Once you know, you can begin making preparations to improve your credit score if you do not already meet the credit score requirements since so long as you are willing to put in sufficient time and effort, you should have no problems changing it for the better.
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