What is a credit score range?
First, the main function of Credit Unions and Banks is to accept deposits from the public and sanction loans. Credit unions and banks Pay Interest on deposits and are entitled to receive interest on loans. So what does this have to do with your Credit Score Range?
The difference in the interest payable and receivable is the profit margin for a credit union. However, it is as simple as it seems.
Profitability of a Financial Institution
Credit Unions and Banks have to pay interest on deposits, no matter what. In the case of receiving interest on loans, banks face many restrictions. Also, they cannot charge interest on every loan it sanctions. There is a connection between charging of interest and recovery of interest.
In other words, credit unions can only charge interest on those loans on which it can realize. This reduces the interest component and becomes a drain on the profitability or in the case of credit unions dividends.
Concept of Performance of Assets
The assets of a credit unions and banks comprises of two aspects. The performing assets are earning interest income for the banks. Furthermore, the non-performing are those that are a drain on the profitability. Thus, banks have to be careful while lending to borrowers.
Borrowers are always one-step ahead. They manage to find ways to default on their repayments. That is why conventional wisdom of financial institutions is that spread the loan portfolio among all credit ratings (Sometimes referred to as A, B and C paper)
Credit Unions and banks that tend to lend more money to C paper (also average-below average credit) will also have larger collection and repossession departments as increased risk requires the associated staffing. However, the C paper is more profitable because banks can charge a higher interest rate compared to A paper.
In the days gone by, the borrowers could easily approach different credit unions or banks for financing their requirements in case their present institution declines to finance them based on their recovery performance.
Now it is not so easy to do so. There are a number of credit rating agencies in the market today. All financial institutions in the country have a tie-up arrangement with these credit rating bureaus (Equifax, Experian and TransUnion). The job of the credit rating agency is to collect information about the borrower and rate him based on his repayment records with all the banks as a whole.
This entails that he cannot escape after defaulting to a particular institution. The banks can access his repayment record with other banks and arrive at a decision based on his credit ratings which impacts how you fall within the credit score range. This credit rating is the credit score of the borrower.
Credit score Formula
The credit score owes its calculation to various factors such as missed or late payments, number of open accounts, credit history and other factors relating to loans and advances. In case you default on a single installment of a loan, your score takes a hit.
Every time a prospective lender searches for your score, you lose some points irrespective of the fact the bank sanctions the loan or not. Thus, you should ensure not to make multiple applications for loans with different banks.
Credit Score Range
Finally, the credit score starts from an odd figure of 300 and goes up to 850 depending upon the factors mentioned above. A score between 300 and 579 is usually on the poor side. Any score in the range of 620 to 679 is acceptable as satisfactory. Scores over 680 are good. These are all indicative factors. It is a statistic.
Over and above all these scores, there is something known as the character of the borrower. The character of the borrower should have a bearing on bank finance.
However, credit unions always seek to strike the right balance between material statistics rather and the always important human factor today.
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