How Important is Your Credit Score?
A simple reason why the 3 digit FICO score is so important is because it alerts potential lenders to the fact that the business owner has a vested interest in making sure the loan repayment can be made… and so, therefore, the risk of default should be evaluated in advance.
So what is a credit score?
Credit scores are calculated by the Fair Isaac Corp, who are in turn responsible for formulating different levels of credit scores from which the business owner can choose as to whether to go ahead and actually take the loan. A FICO credit score can be anywhere from 300 to 850, depending upon the different factors and the financial form of the business entity.
There are a number of practical examples that can give us a better insight into how FICO scores actually work. It’s important to note that FICO numbers will differ from lender to lender – so choose your lender carefully and react accordingly (which is another reason that you may wish to have a mortgage with different vendors of your business)
A lower score means that the business owner is at higher credit risk, meaning that he is less likely to be granted an F loan at the same interest rate as someone with a higher credit score. In some instances, financial institutions may approve a business loan to persons with a credit score of approximately 600 – but this much higher credit score would ensure that the lender charged a much higher interest rate.
FICO scores can also range from thieving lowest200 on the lowest up estimate of 850. So while a specific range may be quoted as 300 – 850, the overwhelming majority of persons are somewhere in the higher end of the scale.
Conversely, persons with a score of 850 are at the lowest end of the scale with lenders and therefore it would make sense then that they would pay the lowest interest rates.
Clearly, yet crucially, a high credit score can be of immense assistance if a prospective businessperson wants to maintain the same kind of credit scores as those with excellent credit: Because in the event that he or she needs to have his or her credit line or credit line reduced because of a non-payment or default of some kind, those with excellent credit can be allowed to continue to borrow at the same rate of interest or even compress those future loan payments firmly.
So wise business owners will take in as much information as they can from their credit score once they are in business… and then make the requisite amendments to improve their score.
How is your credit score Calculated?
Of course, just as your FICO score can differ from one company to the next, so too can your actual credit score be affected by a number of the different variables. As an example, your capacity to repay your loan – referred to as the capacity to pay the term of the loan in some sectors – can make a huge difference in your credit score. Lenders try to assess the risk of lending money to clients in terms of whether they’ll be able to repay the money, offering the ‘ATE’ test. If they conclude that the client does not pose any ‘ incarcerated risk’ in terms of the ability to repay the loan, then the finance company will support your loan and offer you a higher credit limit. On the other hand, if your score indicates that you will, in time, default on the loan, then your lender will offer you a lower credit limit, and may even impose a higher interest rate.
Beyond Factors That Are variable, the two factors at the heart of your FICO score – the credit history of the enterprise and the type of credit used – provide even more information about you and your enterprise to the lender.
What Your Score Produces
In reality, of course, your FICO score may fall within a range between 300 and 850, the higher of the number being the better – and with a higher score, you can benefit from incentives obtainable with a higher credit rating.
Whilst different lenders may offer differing incentives – or variations on the same incentives based upon the credit score profile of a customer – it’s wise to be familiar with the possible options you have when adopting a certain credit score profile. They can be the very same incentives that under the usual circumstances would be available to persons of differing credit risk profiles.