What Does Your Credit Score Tell Lenders About You?

One of the most important things lenders look at when deciding whether to give you a loan or line of credit is your credit score. It gives lenders a quick look at how creditworthy you are and how likely it is that you will pay back your debts. But what does your credit score really tell lenders about you as a borrower?

The Basics: What Is a Credit Score?

A credit score is a numerical representation of your creditworthiness. The most commonly used credit scores range from 300 to 850. Higher scores indicate lower credit risk, while lower scores suggest higher risk.

Credit scores are most often based on the FICO score, which was created by the Fair Isaac Corporation. FICO scores are calculated using information from your credit reports from Equifax, Experian, and TransUnion.

Lenders use credit scores to help them make quick lending decisions. Rather than poring over your entire credit history, they can use your score as an indicator of how likely you are to repay debt. The higher your score, the lower your perceived credit risk.

What Impacts Your Credit Score?

Your credit score is calculated based on five main factors

• Payment history (35% of score): Whether you pay your bills on time. Late payments can significantly hurt your score.

• Total amount owed (30%): The difference between how much you owe and how much credit you have available. This is also called the credit utilization ratio. High utilization hurts your score.

• The length of your credit history (15%) shows how long you’ve had credit accounts open. Longer histories help your score.

• New credit (10%): Opening many new accounts in a short period can negatively impact your score.

• Credit mix (10%): Having different types of credit – credit cards, loans, mortgages, etc. Mix of credit helps your score.

Maintaining good credit health per these factors results in higher credit scores. Poor credit management leads to lower scores.

What Credit Score Range is Considered Good?

Though credit scores range from 300 to 850, most fall between 600 and 750. Here’s a breakdown of different credit score ranges:

• 800-850 – Exceptional
• 740-799 – Very Good
• 670-739 – Good
• 580-669 – Fair
• Below 580 – Poor

Scores above 700 are generally considered good to excellent. You’re more likely to get approved for credit at better interest rates with scores in this range. Scores under 600 will make it difficult to get approved for most types of credit.

Each lender has their own standards, but most look for scores above 670 before approving applications. The higher your score, the better your chances of getting the loan or card you want.

What Does My Credit Score Tell Lenders?

Now that we’ve covered the basics, let’s dive into what your credit score really says about you as a borrower. Here are the main things lenders learn from your credit score:

1. How you’ve managed credit in the past

The biggest thing your credit score indicates to lenders is how responsibly you’ve managed credit in the past. Late payments, high balances, and other negatives provide evidence that you may not handle future debt well.

A high score built on consistent on-time payments and low utilization shows lenders you know how to use credit wisely. This suggests you’re more likely to pay back new loans or debts.

2. Your default risk

Lenders view borrowers with lower credit scores as riskier than those with higher scores. If you have a 300 credit score, lenders will see you as an extremely high default risk. A 850 score indicates minimal risk.

Your credit score gives lenders an idea of how likely you are to pay back a loan or make credit card payments on time vs. default. Higher scores equate to lower perceived risk.

3. Your creditworthiness

At its core, your credit score shows lenders how creditworthy you are. The higher your score, the more worthy lenders will deem you of new credit.

Good credit scores signify you manage credit responsibly and will likely continue doing so with new accounts. Bad scores equal higher risk and may make lenders deem you not worthy of credit until you improve your score.

4. How much credit you qualify for

Lenders use credit scores to determine what types of loans and credit cards you qualify for and at what rates/terms. The better your score, the more likely you’ll get approved for credit and receive favorable interest rates and terms.

Consumers with excellent 800+ scores qualify for the largest loans and credit lines at the lowest rates. Those with poor sub-600 scores often don’t qualify for traditional unsecured credit at all.

5. How much money you can borrow

In addition to dictating what credit products you qualify for, your credit score also impacts how much lenders are willing to lend you.

The higher your credit score, the more comfortable lenders will be extending you higher credit limits and loan amounts. They trust borrowers with excellent scores to handle more debt responsibly.

Borrowers with poor scores often only qualify for small loans and credit lines at less favorable rates until they improve their credit profile.

The Takeaway

Your credit score provides lenders with a quick snapshot of your past credit habits, risk level, creditworthiness, and qualification status. Excellent scores signal that you know how to manage credit responsibly and get access to the best lending terms. Poor scores suggest higher risk that make lenders hesitant to extend credit.

Keep your score in the good to excellent range by paying bills on time, keeping credit card balances low, and minimizing credit applications. This will make lenders more willing to approve you for the credit you want at the best possible rates. Check your scores regularly and take steps to improve them if needed before applying for new credit.