It takes a person who understands the working of a credit score to use it to their advantage when seeking any kind of loan. In fact, knowing how a credit score works will help you monitor your spending and loan repayment.
So, how does a credit score work? Nick Wilson, the founder of AdvanceSOS and an expert loan officer, explains it below. While reading, you understand what a credit score is, how you can calculate it, what factors are behind it, and why they are essential.
What Is A Credit Score?
A credit score is a figure used to represent the possibility that a consumer will pay their bills and debts on time. It could be called a risk score. When calculated at a high credit score, lenders and banks will classify such a person as low risk.
The several different types of credit scores which exist are a result of two specific reasons. First are the credit scoring systems, with each system with its own unique score, and, second, are the multiple credit bureaus that compute scores.
Each person has several credit scores. Each credit score varies but at a comparable range.
How Is A Credit Score Calculated?
A credit score is calculated by the credit bureaus by using pieces of information available in their files. Equifax, TransUnion, and Experian are the three major credit bureaus that handle consumer credit scores.
These three major credit bureaus handle credit files on consumers in the U.S. Your financial information is included in this file, and when a company or organization receives its loan payment or bills, it is then reported into your file that you have paid on time. The same will be done when you pay later, and it will be notified that you made your payment late; if you’ve missed a payment, it is registered in your file, too.
A credit scoring system is applied to the information available to you by the credit bureau, which is used to calculate your credit score. This is done for all credit scores you have in your name by using multiple scoring systems. The reason for the variation is the usage of each credit score.
Your credit scores also vary from bureau to bureau because not all the same information is gotten by the bureau. For instance, a creditor reports your payment to TransUnion and Experian but not to Equifax; this will lead to a different credit score.
Credit Invisible Consumers
Now, there are “credit invisible” consumers who do not have credit files at any of the credit bureaus and accordingly do not own credit scores.
There are also consumers with “thin” credit files because the lack of information the credit bureaus have on them has made it impossible for their credit scores to be calculated.
FICO Score And Credit Score
FICO Score is a type of credit score calculated using a FICO scoring system. Credit scores are calculated by different scoring systems; FICO scores are calculated by different scoring systems and it is widely used by lenders.
FICO score could be used interchangeably for credit score and to understand the difference, the Credit score is not a FICO score, but the FICO score is a credit score. FICO score puts into account the different credit and debit cards used.
Another difference is the ranges of FICO score and credit score. They both use adjectives like poor, fair, good, very good, and exceptional.
Under FICO score 300-579 represent poor, 580-669, 670-730, 740-799,800-850 represent fair, good, very good, and exceptional, respectively.
Another popular scoring system is Vantage Score with ranges from very poor to excellent, and the scores are as follows: 300-499, 500-600, 601-660, 661-780, 781-850, which represent very poor, poor, fair, good, and excellent respectively.
The average credit score falls in the “good” range of both the FICO scoring system and the Vantage scoring system.
Are Credit Scores Necessary For Payday Applications?
When going through a payday lending website, certain criteria must be necessary provided. They include; your age, valid I.D. card, ZIP code, SSN, evidence of a source of income with earning of more than $800 per month.
How do credit scores come into payday loans applications? Regardless of how good or bad your credit score might be, credit loans have no effect on your application.
It serves well to have a good credit score, because it indicates how diligent you are with spending and settling bills. It could attract lenders of a different loan but not payday loans.
Why doesn’t a credit score matter when payday loans are involved? Because the focus of the lender is your credit history, and source of income, which will tell whether you can pay back the loan.
Some lenders take advantage of this and continue to offer multiple payday loans to put borrowers in debt traps, but certain laws have been created by the government prohibiting lenders from lending multiple payday loans.
AdvanceSOS is a loan connection service provider that accepts your loan application and matches it with payday lenders ready to lend you a small-dollar payday loan. Our fast and easy application only takes 3-5 minutes and will reach all our licensed lenders.
Credit scores might not be very important when payday loans are involved, but they guarantee an adequate money-sufficient future. By borrowing money, you can borrow any given loan with an excellent credit score.
Auto loans and mortgages will become easily accessible, and your credit score will be used as the ice breaker in the approval of your loan application. In addition, a credit score above the “good” range can help you make money through credit card rewards.
On the other hand, a “poor” credit score will keep off lenders other than payday lenders away from you. It reduces the chances of getting a higher loan and could cost you even more money.