Your credit score is a three-digit number that lenders use to assess your financial reliability, current debt, and risk of default. It plays a key role in securing loans, good credit card rates, and major purchases like a house or car. Understanding how it impacts loan eligibility, with guidance from the Service Star Realty team, can help you secure lower interest rates and save money over time.
Introduction to Credit Scores
At its core, a credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. While there are several scoring models, the FICO score is the one most commonly used by lenders.
These scores are calculated using data gathered by the three major credit bureaus: Experian, TransUnion, and Equifax. While the exact algorithms are proprietary secrets, we know the five main factors that influence the number:
- Payment History (35%): Do you pay your bills on time?
- Amounts Owed (30%): How much of your available credit are you using?
- Length of Credit History (15%): How long have you had your accounts?
- New Credit (10%): Have you opened several accounts recently?
- Credit Mix (10%): Do you have a healthy mix of credit cards, retail accounts, installment loans, and mortgage loans?
This calculation results in a score that typically ranges from 300 to 850. The higher the number, the lower the risk you pose to a lender.
Understanding Credit Score Ranges and Their Impact
Knowing your number is only useful if you understand where it falls on the spectrum. Lenders generally categorize scores into specific ranges, each coming with its own set of expectations regarding loan approval and terms.
Poor (300–579)
If your score falls in this range, you are viewed as a high-risk borrower. This often results from a history of late payments, defaults, or bankruptcy. Securing a traditional loan in this bracket is difficult. If you are approved, you will likely be required to pay a deposit or face significantly higher interest rates to offset the lender’s risk.
Fair (580–669)
This is often considered the “subprime” category. You can likely get approved for loans, but you won’t get the best deals. Lenders may require a higher down payment or impose stricter terms. This is a common starting point for people with little credit history or those recovering from past financial mistakes.
Good (670–739)
For most lenders, this is the target range. If you are here, you are considered an “acceptable” borrower. You won’t struggle to get approved for most credit cards or loans, and the interest rates offered to you will be competitive, though perhaps not the absolute lowest available.
Very Good (740–799)
Borrowers in this range are dependable. You will likely receive better-than-average interest rates from banks and lenders. At this level, you have significant negotiating power.
Exceptional (800–850)
This is the gold standard. Borrowers with exceptional credit get the “red carpet” treatment: the easiest approval processes and the lowest possible interest rates and fees.
How Credit Scores Affect Loan Eligibility
Your credit score does two things when you apply for a loan: it determines if you get the money, and how much that money costs you.
The Gatekeeper of Approval
The most immediate impact is simple approval. Lenders have internal “cut-off” scores. If a mortgage lender requires a minimum score of 620 and you have a 610, your application might be automatically rejected regardless of your income.
This is particularly true for unsecured loans (like personal loans or credit cards) where there is no collateral like a house or car for the bank to seize if you stop paying. Because the risk to the lender is higher, the credit score requirements are usually stricter.
Interest Rates and Risk-Based Pricing
Once you hurdle the approval bar, your score dictates the price. This is known as risk-based pricing. Lenders charge higher interest rates to borrowers with lower credit scores to hedge against the possibility that the borrower might default.
The difference of a few percentage points might seem negligible, but it compounds over time. On a 30-year mortgage, a 1% difference in interest rate can equate to tens of thousands of dollars in extra payments over the life of the loan. A borrower with a 760 score might get a 6.5% rate, while a borrower with a 640 score might be offered 7.5% or higher.
Down Payments and Terms
Beyond interest, a lower score can tighten other loan terms. You might be asked to put down a larger down payment on a car or home to secure the loan. For example, specific home loans like those offered in Provo, Utah, might have different underwriting flexibility compared to large national banks, but generally, a lower score almost always necessitates more “skin in the game” (cash upfront) to convince the lender to sign off.
Tips for Improving Your Credit Score
If your score isn’t where you want it to be, the good news is that credit is fluid. It changes as your financial behavior changes. Here are strategic ways to move your score in the right direction.
Master Your Payment History
Since payment history makes up 35% of your score, this is the most critical habit to fix. Set up automatic payments for at least the minimum amount due on all your accounts. A single payment missed by 30 days can drop a good score by substantial points. If you have past-due accounts, get them current as soon as possible.
Lower Your Credit Utilization
This is the fastest way to boost your score. Credit utilization is the percentage of your credit limit you are currently using. If you have a $10,000 limit and a $5,000 balance, your utilization is 50%.
Financial experts recommend keeping this under 30%. If you can pay down balances to get below that threshold, you might see a score increase within a month or two when the issuer reports the new balance to the bureaus.
Don’t Close Old Accounts
When you pay off a credit card, your instinct might be to close it. However, length of credit history helps your score. Keeping an old account open (even with a zero balance) increases the average age of your accounts and helps your utilization ratio by keeping that credit limit available.
Limit Hard Inquiries
Every time you apply for credit, a “hard inquiry” appears on your report, which can temporarily ding your score by a few points. If you apply for five different credit cards in a month, it signals to lenders that you are desperate for cash. Try to space out your applications.
Monitor Your Report for Errors
Mistakes happen. A study by the FTC found that one in five consumers had an error on at least one of their credit reports. You are entitled to a free credit report from each bureau every year. Review them closely. If you see an account you didn’t open or a payment marked late that you paid on time, dispute it immediately. Removing negative errors can cause an instant jump in your score.
Conclusion
Your credit score is a tool that reflects your financial habits, not your character, and it can be improved with deliberate effort. Understanding credit score ranges and taking steps to build a strong score can unlock financial opportunities, such as buying a home, starting a business, or achieving financial stability.
