Creditworthiness, Capacity, and Credit Scores
In our day-to-day we all use cash, debit cards, and credit cards for our regular purchases and expenses. Eventually, it’s likely that all of us will also find ourselves sitting across the desk from a personal banker applying for a loan. Some of us will leave disappointed, asking ourselves, “I can afford the loan payments, so why didn’t I get the loan?” The answer lies within realizing the difference between your ability to pay the loan (capacity), and your overall credit standing (creditworthiness). Just because you can afford to make the payments, it doesn’t mean a lender will give you the loan.
Although your capacity is extremely important to all lenders when determining whether or not to approve you for a loan, they will also take into consideration your creditworthiness. Creditworthiness is not black and white—“Good Credit” vs.“Bad Credit”—it simply means your credit is good enough to be approved.
Not everyone is creditworthy, but if lenders only gave loans to people with good credit, many of us wouldn’t be able to buy cars, homes, or even go to college. Banks know and understand this, thus offering better loans and lower interest rates to those who are more creditworthy than others. In order to determine a person’s creditworthiness they use credit scores. Below is a breakdown of the most commonly used credit scoring formula, FICO, which ranges from 300-850.
Less than 600 You will have a very hard time getting any kind of loan.
600-640: You will have access to lending, but you will have very high interest rates.
641-680: This is ok. You will be able to get decent interest rates on loans, but still not entirely desirable.
681-720: This is good. You will always be able to get loans easily, and the higher end of this has a good chance of quite low interest rates.
720 and up: This is the credit score goal. You will be getting the best possible rates and be able to do anything you want with your credit.
Although your capacity is extremely important to all lenders when determining whether or not to approve you for a loan, they will also take into consideration your creditworthiness. Creditworthiness is not black and white—“Good Credit” vs.“Bad Credit”—it simply means your credit is good enough to be approved.
Not everyone is creditworthy, but if lenders only gave loans to people with good credit, many of us wouldn’t be able to buy cars, homes, or even go to college. Banks know and understand this, thus offering better loans and lower interest rates to those who are more creditworthy than others. In order to determine a person’s creditworthiness they use credit scores. Below is a breakdown of the most commonly used credit scoring formula, FICO, which ranges from 300-850.
Less than 600 You will have a very hard time getting any kind of loan.
600-640: You will have access to lending, but you will have very high interest rates.
641-680: This is ok. You will be able to get decent interest rates on loans, but still not entirely desirable.
681-720: This is good. You will always be able to get loans easily, and the higher end of this has a good chance of quite low interest rates.
720 and up: This is the credit score goal. You will be getting the best possible rates and be able to do anything you want with your credit.
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