A credit score is awarded to people with a view to gauge their creditworthiness. Credit score is based on a mathematical formula which is applied to the information in the credit report of an individual. The credit report is generated by the three major bureaus who record all the credit and financial activities of individuals. A credit score can range between 300 and 850, and higher the number better is the credit score.
Many lenders and banking institutions consider 700 and above to be a good credit score. A good credit score predicts that the individual is a potentially good client and there are very good chances that he will repay the loan amount in time along with the accrued interest.
Lenders depend on the credit score to sanction any loan amount. Credit card companies also take a close look at your credit report and credit score before extending any credit. Credit scores play a major role in determining the amount and duration of the credit which has to be extended. If you have a good credit score, credit card companies will extend a larger credit amount, with a lesser interest rate.
For lenders, credit score is a very good tool for judging the creditworthiness of an individual and what is the risk involved in lending to such a client. When a lender is able to gauge the risk, he is also able to fix a fair interest rate on the loan. So, if you have a good credit score, the lender will consider you to be a low-risk client and your interest rates also will be low. Let us take an actual example which shows how a good credit score affects the actual interest rate. For a 30 year mortgage on three hundred thousand dollars, a person having a credit score of 760 or above will have to pay an APR of only 4.994%, while an individual having a credit score of 620 will have to pay 6.583%. This shows a marked increase of almost 1.5% which when calculated on the mortgage comes to be a large amount.
As we can see there are many advantages of having a good credit score, especially during this period of economic downturn. People with good credit scores are able to get more credit for a lesser interest, and also other better terms. A credit score can be improved upon, by following certain practises. You should make it a point to always make your payments on time. Also make minimal use of your credit cards and store cards.