So you’ve finally decided to apply for a loan, but there’s one problem—you don’t know your credit score, or you don’t know what it means. So how will you ever get approved? Well, never fear. In this article, we will discuss what a fair credit score means and how much it impacts your loan application’s outcome.
What is a Fair Credit Score?
A person’s credit score is a numerical representation of their creditworthiness. A personal loan fair credit score is generally considered to be a score of 620 to 679.
FICO Scoring Models Are Designed to Predict Risk
The higher your FICO Score, the lower your risk of defaulting on an obligation. It’s important to know that many different versions of the FICO Score don’t all work in the same way.
How FICO Scores Are Calculated
FICO scores are computed from five main factors: payment history, amounts owed, length of credit history, new credit, and types of credit used. Here’s how each factor affects your score:
- Amounts owed – 30%
- Payment history – 35%
- Length of credit history – 15%
- Types of credit used – 10%.
- New credit (credit inquiries, recent applications) – 10%
If you have a higher than average FICO score, you’ll qualify for better loan rates and lower monthly payments. Conversely, a low credit score can lead to high-interest rates and an inability to qualify for certain loans.
The Importance of Payment History
Your payment history is an important factor in calculating your FICO Score, accounting for 35% of its overall calculation. You have to make sure you always pay at least the minimum due on time.
When Your Payment History is Bad
Most lenders will use your payment history over your last two years as one of their primary determinants when deciding whether or not to offer you a loan and what interest rate they’ll charge you.
How Long Negative Information Stays On Your Report
Credit report information stays on your report for seven years from when it was first reported. However, some negative information can stay on your report longer if you don’t repay the debt in full or you have multiple debts that are late by 60 days or more.
Different Ways to Make Your Credit Reports Fairer
If you have a low credit score, take these steps to make your report as accurate as possible. First, contact all three major credit bureaus and ask for an investigation. Then, get copies of your credit reports and study them closely for errors that need to be corrected with the bureaus. According to Lantern by SoFi, “The better your credit score, the better the rates you’re likely to qualify for when applying for financing.”
How to Improve Your FICO Score
Understanding your FICO score can help you take steps to improve it if it’s lower than you’d like or feel more confident that you’re in good shape if it’s higher than average. To get your free Experian FICO Score, just sign up for the service on our website and follow the instructions.
Many different factors go into determining what your credit score means and what it will take to improve it. If you have a score between 700-740, then you’re in good shape for the most part.