How Do Credit Scores Work?

How Do Credit Scores Work?
How Do Credit Scores Work?

Whether your business has a fleet of vehicles or you use your own vehicle for your business needs, you may be considering refinancing. Of course, there is some anxiety in the process; a loan company will approve or deny your application or decrease or increase your interest-based upon your credit scores. So, what are credit scores, and how do they work?

You Have Several Scores

Several Credit Score

Why Different Scores?

The main credit reporting agency is FICO. That acronym stands for the Fair Isaac Corporation. The FICO scores, however, are scores from three agencies: Equifax, Experian, and TransUnion. The scores from each of the companies may be slightly different. One of the differences is what data is collected. Your credit card use is reported to all of the “Big Three,” but if you get a loan from your local bank, that data may only be given to one of the companies.

Another reason you have different scores is that there are slightly different calculating formulas for auto loans, mortgages, businesses, and personal loans.

What They Contain?

The scores have two focus areas. The first is your personal history. The second focus area centers on your use of credit. There are five detailed aspects of this use.

  • Your payment history: This includes how often you made late payments or no payments. The payment history is 35 percent of your score.
  • Your current debt: Experts advise keeping your available credit at a minimum of 70 percent. That means the balance of all of your cards combined will be no more than $3,000.
  • Length of credit: This involves how long you have used credit and is 15 percent of the scores.
  • New Credit: Lenders are interested in whether you have applied for many loans in a short amount of time. This is 10 percent of the score.
  • Types of credit: Your history should include a balance of several types of loans. This is 10 percent of your score.

How Credit Scores Work?

Lending companies report your credit applications to credit companies that generate the scores based on the data. A score of under 580 indicates the applicant might be at high risk of defaulting on a loan. If credit is extended at all, it would probably be at a high-interest rate. A score of 700 to 799 shows the applicant has a good history of borrowing and repayment. Anything more than 800 is considered exemplary credit use. The higher your score, the more likely you will get the requested loan. Your interest rate also depends upon your score.

Applying for several loans over a brief time also is a “red flag” for lenders. There are two types of credit checks lenders make. The first is a soft check, indicating you are shopping for a loan, including inquiries to lenders. Inquiries do not affect your credit scores because other lenders will probably not see them. The second type is a hard check, and this occurs when an application is actually made to a company. This information is made available to all lenders. It does impact your scores whether or not you get the loan, according to Lantern by SoFi.

Using a company like Lantern can help you maintain your credit score by working with several lenders who provide rates and estimates to possible applicants but only do a hard check when the application is made. Refinancing your company vehicles could be a wise move, freeing up capital for improvements and day-to-day expenses. It can also improve your debt-to-income ratio, raising your credit scores and your car loan refinance rates.

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