Credit score is a numerical measure of an individual's credit worthiness since it reflects the possibility of the individual repaying or defaulting on the loan amount borrowed based on his borrowing history. Hurley and Adebayo (2016) It enables lenders to determine how much loan and at what interest rate an individual may borrow and repay within a specific time frame. It also helps the lender understand the individual's credit history. Understanding about the significance of a credit score helps students understand the significance of saving in financial organizations such as banks. This is so because it makes it easier for the individual to ask for credit services from a financial institution than from individuals especially if one requires urgent funding or a large amount of it. A credit score is very important especially to the financial life of an individual in various ways. It makes it easier for the issuing of credit or debit cards by the banks. (Olen, 2016) Stores also accept cheques and operations in corporations can be easily managed. It is therefore important for individuals to maintain a good credit score to enable them access credit services easily.
The credit bureaus are responsible for issuing credit scores. They have a number of evaluation systems and each is based on its individual factors. There are the major factors used which are the individual’s history of credit payment, credit history period of time, current individual’s debts and individual’s application frequency for credit (staff, 2017). Credit scores are usually presented between a range between 350, which is interpreted to represent risk that is extremely high and 850, a value representing risk that is considered to be extremely low (staff, 2017).
Most people do not understand the process through which a credit score is generated. First of all Information is sent by the lender to a credit bureau anytime an individual borrows money. This information, is presented in form of a report detailing how the individual handled their debt. The bureau, from the information given, based on the above five factors determines the credit score. Although all the five factors affect an individual’s credit rating, the historical ability of paying off debts is much weightier in determination of a credit score (staff, 2017).
The credit score is important to both the lender and the borrower, but it has more impact on the borrower. The credit score, if good, assists the borrower to easily access the amount of credit applied for since they have proven their ability to pay. A good score also leads to reduction of the interest rate charged on the amount since there is minimum risk on the amount as determined using historical credit information. This in turn assists the lenders to lend to more people since the amount is paid off quickly. A bad credit score limits the amount the borrower can get. Because the borrower is seen to have a likelihood of defaulting. Additionally, if credit is granted, there will be an increased interest rate which includes a risk rate since there is a high risk on the amount because there is no guarantee of payment. This limits the lending rate of the lenders since the amount they have lent is not easily recoverable (Lazarus, 2012)
When it comes to buying a car, one should really pay close attention to their credit score since that’s what lenders use to decide whether or not to give an individual a loan and at what rate. Borrowers with 781 and above as their credit score are sure of the lowest rates. In the third quarter of 2016 for example, for a new car and used cars borrowers who received financing had an average of 714 and 655 as their credit score and loan terms of 68 and 66 months respectively (strohm, 2017).one requires higher scores to increase chances of receiving cheap financing and best rates since the length and amount of auto loan is continuously growing. Before shopping for a car, the borrower should ensure they improve their credit score.
When buying a new house or real estate or mortgaging, one requires a large amount of money, often needing to borrow and their credit score is therefore important. However, the collapse of sub-prime market has caused effect in the mortgage sector. It has made it difficult for borrowers with poor credit scores or undocumented incomes to qualify or access home loans. For one to access a real estate mortgage, their average credit score should be 682 however it keeps on changing depending on the economic performance, type of loan applied for and the location of the house (creditsesame, 2017). A house mortgage loan can last between 15-30years. For a conventional loan for example, one requires a minimum score of 620 while for a FHA loan, one requires a minimum score of 580. Generally one requires an average score of 600 and above to buy a house (creditsesame, 2017).
Business loans require a higher credit score as compared to personal loans. This is because they require larger amounts as compared to the latter, hence representing higher risk. According to lenders, a good credit score interprets the ability of the borrower to handle money responsibly. A poor credit score leads to a small amount of business loan. (huebsch, 2017). In addition to business scores, one should also have a good personal score in case of emergency financial requirements. Credit reports for businesses are numbered from 0-100. A borrower with a 75 as their score is considered a good borrower (huebsch, 2017). One should ensure a good score before considering to borrow a business loan.
A credit score can either make or break an individual’s financial decisions. An example is if one had a loan earlier and has been paying without fail and then later gets a great deal to purchase a cheaper new car for example, and decide to apply for another loan. The application for the new loan is turned down and on inquiry one finds that the bank registered a defaulted payment in one of the months on the credit report which was used to access the borrower’s ability to repay the loan being requested. The defaulted payment is as a result of banking error. On requesting the bank to correct the error, he is promised that the matter will be reversed. Even after correction this single record causes the borrower’s credit score to drop and lowers the amount of loan the borrower can be given. This in turn limits the financial decision a borrower can make due to constrained financial situation.
A good credit score on the other hand enhances great financial decisions since the borrower is almost sure of the amount he is going to receive after application for a loan. This is so because the good credit report gives an assurance to the lenders that the chances of the borrower defaulting the loan are minimal considering the good history of his prompt and timely loan repayments.
Conclusion
Borrowers should therefore ensure that they maintain a good credit score at all times in order to better their chances of getting financial assistance at any particular time they may need it by gaining the trust and confidence of the borrowers. A good credit score as seen has a great influence and is a determinant of aspects of an individual’s financial needs.
References
creditsesame. (2017, august 10). Retrieved September 26, 2017, from htttp://www.creditsesame.com: https://www.creditsesame.com/blog/credit/what-credit-score-is-needed-to-buy-a-house/
huebsch, r. (2017). hearst newspapers, LLC. Retrieved September 26, 2017, from smallbusiness.chron.com: http://smallbusiness.chron.com/good-credit-business-loan-239.html
Hurley, M., & Adebayo, J. (2016). Credit Scoring in the Era of Big Data. Yale Journal of Law and Technology, 18(1). Retrieved September 26, 2017, from http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=1122&context=yjolt
Lazarus. (2012). The Ambition of Credit Scoring: Forecasting Credit Failure. Raisons politiques. Retrieved from http://www.cairn-int.info/article-E_RAI_048_0103--the-ambition-of-credit-scoring-forecasti.htm
Olen, H. (2016). Retrieved September 26, 2017, from Slate: http://www.slate.com/articles/business/the_united_states_of_debt/2016/06/what_is_a_credit_score_and_why_is_everyone_so_obsessed_with_them.html
staff, i. (2017). investopedia. Retrieved September 26, 2017, from www.investopedia.com: http://www.investopedia.com/articles/00/091800.asp
strohm, m. (2017, may 5). Retrieved from Atlantic Broadband: http://www.atlanticbb.net/front_controller.php/news/read/category/Business/article/bankratecom-mitch_strohm_what_credit_score_is_needed_to_buy_a-tca
