The 680 credit score or over: When you apply for a loan at a bank, the first thing you should think about is your credit score. The higher the score, the more likely you are to get a loan with favorable terms. . In general, it means they are taking less risk loaning you money.
Understanding the Factors Used to Create a Credit Score
When your credit score increases or decreases, you can tie the change back to various factors which impact your credit score. The most common credit score comes from FICO (Fair Isaac Corporation), and it is determined by these factors:
- Consumer Payment History: For consumers who pay their bills on time, the reward is a higher credit score. Payment history typically accounts for about 35 percent of your overall credit score, meaning your payment history has a high impact on your score. Banks think that if you have a history of paying your bills on time, there is less chance of you defaulting on the loan you are applying for. That makes you a better risk.
- Proper Credit Utilization: The next significant feature of your credit score is how much of your credit you are using. If you have open credit lines of $50,000 and you are using $45,000, then your credit score will be lower than if you are using only $15,000. Credit utilization accounts for 30 percent of your credit score. The less of your available credit you are using, the more likely a bank is to consider you a good credit risk.
- Length of Established Credit History: Many people do not realize that the age of their credit factors into their credit score. About15 percent of your credit score is calculated by determining the age of your credit history. Not only do lenders look at your oldest open account, but they also look at the average age of all your open credit lines. The longer a credit line has been open, the more likely the bank is to see you as an acceptable risk. New credit lines can wreak havoc on an otherwise stellar credit record.
- Blend of Types of Credit: If the only open credit you have is credit cards, you probably have a lower credit score than someone who has credit cards, personal loans, auto loans, and home loans. This is because the types of credit you have open can account for about 10 percent of your credit score. Banks think that if you have experience handling multiple different types of debt, you will be a better credit risk.
- Recent Credit Inquiries: If you have been applying for new credit cards, personal loans, a car loan, or other credit, you will have numerous inquiries on your credit report. These inquiries can lower your credit score. This factor accounts for 10 percent of your overall score. If a bank sees numerous new inquiries, they could be concerned you are going further into debt, which makes it more difficult to meet your financial obligations.
Benefits of 680 Credit Score for Lenders
When a lender sees a credit score which is considered “good,” which is a range between 670 to 739 as established by FICO, they have confidence you will repay your debt. Additionally, because a 680 credit score falls in the “good” range versus very good or excellent, the bank can also tie your loan to a slightly higher interest rate which means they make more money on your loan.
Remember, the higher the credit score, the lower the interest rate. Since banks make money on the “spread,” higher interest rates mean they are making more money on the loan. The spread is also determined based on the interest rate the bank is paying to have the funds to loan to consumers. That’s why a 680 credit score is ideal if you are looking to apply for a loan.
Risk Management Is Important
The last thing a bank wants to do is chase someone down to get them to pay a bill. Therefore, the higher your credit score, the less likely they are to have to be concerned with your defaulting on a new credit line. This means the bank does not have to worry about making unnecessary telephone calls, sending reminder notices by mail, and, in the event of a default, hiring a credit collection agency to collect on the debt.
Banks have very low risk tolerance because they do not want to be in the collection business. They want to loan money at rates that ensure they are getting a return on the money, collect monthly payments, and move onto the next consumer loan. The higher a credit score, the less likely the bank is to have to invest additional money into collecting money they loan to business owners and individuals.
If you have a good or excellent 680 credit score or over, banks will always be interested in extending credit to you for a new home, a car, or even for your vacation needs.