There was a time in the not so distant past that credit card companies were literally mailing credit cards to almost anyone with a US address. Credit scores were taken into account but they did not hold the weight they should have. As a result, many banks and financial institutions went under during the financial crisis of 2008 and 2009.
Today it is much more difficult to qualify for a credit card and premium credit cards are available to only a select few with a nearly perfect credit history. So what is the relationship between a credit score and the availability of credit cards and how does a personal credit score affect how lenders view your creditworthiness? Here are a few points the team at www.realbusinessrescue.co.uk have put together you may wish to consider.
Take Time to Understand Just What a Credit Score Is
One of the big mistakes which consumers make is in failing to understand exactly what a credit score is. Oftentimes they get a credit score confused with their credit history and this can be a grave mistake. It is true that your credit history plays a big role in determining your final score, it is not the sum total of your score. Your credit history only accounts for a portion of your credit score so it is incumbent upon you to take a few moments to understand how your score is tallied.
Also, it is vital to understand that many lenders do not rely solely on your credit score to determine creditworthiness. Some will take certain types of accounts into consideration and give them more or less weight accordingly. For example, it is widely recognized that banks and other lenders will place less weight on such things as medical bills but will focus on unsecured debt such as other credit cards and personal loans. Even so, you should keep your score sufficiently high to rank at least above 620 if you hope to qualify for any type of credit whatsoever.
Breakdown of Widely Used Fair Isaac Corporation (FICO) Scores
While the Fair Isaac Corporation (FICO) credit score is the most widely used by lenders in the United States, it is not the only credit rating score available. Perhaps 90% of lenders use your FICO score so it makes sense to understand how they rank you and what your score ‘should’ be in order to qualify for credit. First, understand that they use a highly complex formula to calculate credit scores so it would be a huge waste of time trying to do your own computations. Instead, try to focus on the categories that carry greater weight so that you can make improvements to give you the biggest boost quickly.
In effect, a FICO score is comprised of five (5) major categories which include:
- Payment/Credit History (roughly 35% of your total score)
- Total amount currently owed (roughly 30% of your total credit score)
- How long your credit history is (roughly 15%) of the score
- Newer credit – recently opened accounts (roughly 10% of your score)
- Miscellaneous factors (roughly 10% of the score)
As you can see, your payment history and the amount you currently owe (all totaled) make a huge impact on your FICO credit score. Even if you have a nearly perfect history of paying in full and on time, you may be maxed out based on your income. Bear in mind that lenders will look at this when reviewing your application.
Key Points to Understand When Making Credit Card Applications
Not only will lenders look at the total amount due when deciding whether or not to extend credit to you but they will also look closely at the number of new applications you have made within a given timeframe. Many consumers aren’t aware of the fact that applying for too many credit cards too quickly can raise a red flag. Any lender is likely to ask why that consumer is in such need of credit.
However, there is also the fact that every time you apply for credit a few points will be subtracted from your overall score. Therefore, if you are in the market for a credit card, it is suggested that you research rates and fees before making applications and try to keep all those within a 30 day timeframe. This will indicate that you are looking for a credit card and are shopping around for the best rates. Lenders will take this into consideration if the number of applications and the intervals between them are within an acceptable period.
What to Expect within Pre-Defined Credit Score Ranges
Now that you have a better understanding of how credit card companies view a credit score, what can you expect when shopping around for a new card? The quick answer is that you want a score that is over 720 if you want good interest rates and fees. The lower your score falls, the more apt a credit card issuer will be to charge higher and higher rates and fees. A brief outline of credit ranges would be as follows:
- Less than 500 – If you can get a credit card it would be a miracle!
- Between 500 and 579 – Very poor score and while you may get a credit card the interest would be sky high.
- Between 580 and 619 – Poor credit score but some lenders ‘may’ consider extending credit.
- Between 620 and 679 – This is an average score and credit is available but rates will not be wonderful.
- Between 680 and 719 – Quite good credit and this is where you will find decent rates and abundant choices.
- Between 720 and 800 – Here is where the best interest rates and premium cards will be available.
Of course there are very few people who can actually maintain a credit rating over 720 but it is possible to do! If you are in the market for a credit card and your credit score is less than favorable, it may be in your best interest to seek professional help to repair your credit. Sure, there is a fee but that fee may make the difference between exorbitant interest rates and those which are manageable.
What Credit Score Do I Need To Get A Credit Card
In short, if you are searching for a credit card and your score is lower than 620, it would be wiser to repair your credit before applying or you may find yourself in greater debt than you anticipated. Unless you have a good credit score, your chances of getting good rates are slim to none and that’s the bottom line. Good credit = good rates.
Bio: Keith Tully is Managing Director of Real Business Rescue, a team of business advisors who specialize in both corporate and individual insolvency. He enjoys writing about all aspects of finance and credit and helping people to understand sophisticated elements of finance jargon.