As a former Personal Banker and Investment Advisor, I know a little bit of the inside story behind credit scores. The cryptic numbers may mean little to most people, but with a little insight, you too can see everything that these scores have to tell. For me, the score is an important indicator of the efforts that I make to ensure that my finances are in order, and my debts are paid efficiently.
So why do I make such a big deal about a seemingly insignificant number? Well for one thing, I think of it as a pride thing. Aside from that, it represents my future potential. We have to face the fact that without debt, many of the quality lifestyles that we consider to be average would not be possible. Housing, fine cars, and even transcontinental vacations would not be possible without any debt at all. For me, this may only be possible through using my credit. Does this mean I will always use it? Not necessarily, but at least I have the option.
Banks take all sorts of information into account when looking at lending options and the risk involved. There are actually a few different scores that can be taken into account. Your beacon score is a number that represents your past credit history: 500 being poor, 800 or higher being excellent. Most banks will not lend to someone that had a credit beacon lower than 600, but if they do, you will most likely have to pay a higher rate. There is also a credit score that the bank uses to rate you and how good you would be as a borrower, this would be a number that is usually between 50 and 100.
It is important to note that Credit Score is not the only important factor. You could have a great score and still not be able to get credit. Another very important thing that banks take into account when lending to a client is something called TDSR. This is the “Total Debt to Service Ratio.” This is basically a ratio of the amount of money you make per month versus the amount of money you have to spend each month for rent and debts. An example of this is if you were to make $2000 each month, and you have to pay $500 rent and $500 to loans, you would have a TDSR of 50%. Most banks will not go over 30- 35% of unsecured debt. Many people have great credit history, but have too much debt so they get denied credit.