When making a large purchase like a car, it’s likely that you’ll be applying for a loan. Whether a lender is willing to provide you with a loan—and at what interest rate they’re willing to finance you—depends on your credit score.
Sure, we’ve all heard of them, but what are credit scores exactly, and how are they calculated?
What is a Credit Score?
Credit scores are commonly referred to as FICO scores. Although FICO scores are not the only way to get your credit score, they are the figures most frequently used by lenders.
A FICO score is a proprietary tool trademarked by the Fair Isaac Corporation, and the company doesn’t disclose the precise formula it uses to determine their numbers.
We might not know the exact calculations, but we do know the five categories calculating your credit score is based on:
1. Payment History (35%)
Payment history is the largest percentage of your credit score. The category reviews how you’ve handled previous payments on your various accounts to date. It notes issues such as bankruptcy, collections, and delinquency.
The more issues with your payment history, this category finds, the lower—and therefore weaker—your credit score will be.
2. Amount Owed (30%)
Amount owed is the second largest component of your credit score, and it’s based on the amount that you currently owe to lenders.
If you currently have a lot of debt from a variety of companies, your credit score will be negatively affected.
3. Length of Credit History (15%)
The longer you’ve maintained good credit, the better. This is because you’ve proven your ability to responsibly handle your debt, thus making you an appealing candidate for lenders.
4. New Credit (10%)
The new credit component takes into account how frequently you’ve applied for new types of credit and assumes that regularly seeking new credit accounts is a sign of an individual’s financial stress.
Keep in mind that because it signals riskiness to lenders, each time you apply for credit, your credit score will diminish a bit.
5. Type of Credit Used (10%)
The more kinds of credit accounts you hold, the weaker your credit score will be. This is because lenders assume that an individual who only has one or two credit cards is more reliable than a person with nine or 10.
What Does My Credit Score Mean?
Credit scores range from 300 to 850 points. A perfect credit score is 850 points, and the higher your score, the better. Most scores are in the 600- to 700-point range, and scores of 700 and above are considered prime.
Prime scores can get you better interest rates on loans than lower scores, but having a score that’s less than 700 doesn’t mean you can’t receive a loan. You’ll likely just pay more for it due to increased interest rates from lenders.
Start Financing with Good, Bad, or Slow Credit at Nissan 24
If you’re having trouble with your credit or you have a bad credit score, contact us at Nissan 24 of Brockton, MA. We’re dedicated to working with you and your credit score to purchase the new Nissan vehicle or used car of your dreams.
Contact us online today to learn more.