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Are Credit Scores Used When Applying for a Loan?

April 19, 2023

A credit score is a number that lenders use to determine what the risk is if they decide to lend you money. It is how credit card companies, banks and other financial institutions assess whether you can or will be able to pay off your debts. Accordingly, the higher the score, the better the likelihood that you are able to pay off any loans you take out. There are three different credit bureaus that independently calculate your score including Equifax, Transunion and Experian. Although they use similar processes to determine your score, each bureau may have different information about your credit history. It’s a good idea to check each one to make sure all the information is correct. In the US, the credit scoring system you will hear about is the FICO score, which can be anywhere between 300 and 850. Generally, lenders refer to the range of scores as:

  • Poor credit: a FICO score under 630
  • Average or fair credit: a Fico score between 630 and 690
  • Good credit: a Fico score between 690 and 720
  • Excellent credit: a Fico score above 720

The components of your credit score has seven categories, including:

  • Payment History: Your payment history is the largest single component of your FICO score. It is a track record of all the things you have done incorrectly when it comes to your credit and how you behave as it relates to your debts.
  • Late Payments: Regardless of whether you forgot or were struggling to make ends meet, being late on a monthly payment for a credit card or loan will cause a negative adjustment on your credit score.
  • Debt Burden or Accounts Owed: This includes how much you owe in total, the types of loans you have and other quantitative indicators about your overall debt and credit profile. It is considered in relation to your payment history and other factors.
  • Credit Utilization (Debt to Limit ratio): This is a measure of the total amount of the debt on your credit cards against the total limit allowed on those accounts. A lower credit utilization means that your average balance is lower relative to the total amount you could have on your cards which is better for your score. Requesting a higher credit limit on existing credit cards may help your credit score since it will lower the overall ratio.
  • Length of Credit History: The older your accounts and overall credit history, the larger the time frame a company can accurately judge your finances and behavior toward credit.
  • Types of Credit: Your FICO score takes into account the different types of debt or credit used. You may have revolving credit like credit cards, mortgages, consumer finances or installment loans. A history of exposure to different types of credit indicates that a consumer is familiar with different financial products and can manage them effectively.
  • Recent Credit Searches: Searches or hard inquiries made into your credit profile based on the number of times lenders have requested your data can drag your score down.

At Superior Mortgage Co., Inc., we specialize in residential and commercial loans and provide the best products and services available. Whether you are purchasing, refinancing or in need of a home equity loan, and regardless of any credit problems, we can help you. Contact the company that can answer all your questions. Call us at 845-883-8200.