It’s fair to say that money matters have been on the mind for most of us lately, with rising prices putting a strain on us all. It can be a difficult topic to address, particularly with loved ones. However, the more you understand your financial situation, the better placed you’ll be to deal with current pressures and future challenges.
Your credit score is one of the most important indicators of your financial health. It takes into account your credit history as well as any existing financial commitments. Despite its obvious importance, lots of people aren’t aware of their credit score. Even if you know your three-digit number, do you really understand what it means for your financial situation?
FICO’s scoring system has five categories. In this post, we’ll run through each of the five threshold ratings and briefly describe what each means for you and your money.
Poor: <580
A Poor credit score is at the lowest end of the scale, and people in this category will find it very difficult to get approved for any type of new credit. This is because you will appear a higher risk to lenders. Worryingly, 11% of Americans have a credit score below 580. If your credit score sits below this threshold, it’s important you start taking positive steps to increase it. This will mean you have more options for loans in the future.
Fair: 500-669
The next category up is Fair. While this threshold sits in the middle of the scoring range (which is generally between 0-999, depending on the credit reference agency), lenders will still consider it below average and consumers will therefore be deemed high risk. However, there are a range of financial products that people with a Fair score will still have access to – it’s just likely to mean that you pay more in interest or upfront fees.
Good: 670-739
According to FICO’s criteria, a score above 670 represents good creditworthiness. Not only does a Good credit score increase your chances of being approved for a loan, but you’re also likely to be offered more favorable terms by lenders, making it easier for you to pay back the money you borrow. According to recent research, the average American’s score is 714.
Very Good: 740-799
If your credit score sits between 740 and 799, it suggests you are a responsible borrower and have developed strong financial habits. This means that lenders will look more favorably upon any application for credit.
Excellent: >800
An Excellent credit score will give you access to the best rates on financial products, and could mean you’re even offered additional perks by lenders. Even if you’ve built up a score above 800, it doesn’t mean you’ll keep it indefinitely. Make an effort to maintain good habits to keep your finances in a healthy state long-term.
Understanding your financial health
Regardless of which category you fall into right now, your credit score isn’t permanent; depending on your behavior, it can increase or decrease quickly. Even if you aren’t planning on applying for credit any time soon, developing good habits now will strengthen your financial position further down the road, helping to secure your and your family’s future.
