A person's credit score can predict his or her loan repayment behavior, so lenders often use credit scores to decide whether a client is creditworthy, whether to grant a loan and what interest rate to charge. Insurance companies, cell phone service providers, landlords, utility companies and prospective employers might also check credit scores and set a cut-off score to determine whether to engage a person further. If a person's credit score is below the cut-off score, they usually are more reluctant to extend a loan or provide their goods or services to the person.
A credit score runs from 300 to 850 and comes from ratings in five categories, including payment history, length of credit history, new credit, types of credit used and debt levels. Credit scores have nothing to do with income levels; rather, it concerns a person's way of handling bills and debts. A higher score indicates a more responsible behavior and usually leads to lower interest rates on loans. Generally, a score of 740 or above leads to the best rates.
The specific cut-off score differs by company and by industry. Generally, 620 serves as a cut-off score for home loans. Credit card applications and other high-interest loans often have lower cut-off scores. A credit score below 620 indicates that a person is a high-risk borrower who is likely to default on his or her loans. Such a score often leads to higher interest rates on loans and even ineligibility to get some types of loans.
It is not impossible for people with low credit scores to receive loans, because there are many lenders with many different rates and terms for various credit scores. Lenders also consider other factors, such as income and job security, in reaching a decision. A person can have a credit score that is below the cut-off point but, if the lender believes the person will make his or her loan payments, the cut-off score could be ignored and the loan approved. They can also change the cut-off score from time to time. Lenders do, however, ask more questions and set higher requirements for people with low credit scores.
Several credit bureaus calculate credit scores, and each could rate the same person differently. A person can have up to 50 points difference in credit scores from two different credit bureaus. This could be because they collect data at different times of the month or one bureau could base its analysis on inaccurate information.
