Credit Score Ratings and What They Mean

With the widespread use of credit cards and loans, lenders and companies began to search for a method to ascertaining the risk involved in lending a particular loan or giving a particular credit card. The concept of credit rating agencies and credit reporting thus came up. The mechanism is simple as a child's play, the credit reporting agencies maintained date bases for bankers, lenders and credit card companies. Such database contain credit-related information of every individual who as borrowed a loan or has a credit card. In order to make the system more successful, lenders, bankers and credit card companies also report all the loans, installments and payments to the credit reporting agency.

Thus every individual has a 'file' known as a credit report, that is stored with the credit reporting agency. The report is principally divided into 3 parts that are considered by the lender, some personal information such as assets and current salary, the credit history and finally your credit rating or rather the calculation of your credit worthiness. The most important part of the credit rating is the credit score which numerically sums up the credit score review. Maintaining a good score is thus very important.

One must also note that an individual can have more than one score and credit report, since there are multiple agencies reporting credit information. There is also a chance that your credit report contains some or the other mistake, upon which you can initiate a credit dispute with the company. Experian, Equifax and Transunion are three prominent credit reporting companies that provide reports in USA. These companies also permit 1 report, free of cost, every year to the consumer. It is essential that you check your reports every year.

An Explanation on Credit Score Ratings and Their Meaning

In the United States, the most common credit score rating scale, is the FICO score range. The FICO score is a three digit numerical that ranges from 500 to 850. From the point of view of credit score comparison 500 is the lowest score while 850 is the best score. The score is made up with the help of several different facts and figures. The mathematical model that is used to calculated the score is provided by FICO (Fair Issac Corporation). Experian uses Experian/Fair Isaac risk model, while TransUnion makes of EMPIRICA mathematical model. Equifax on the other hand uses BEACON. The following are the constituents of score...

• Payment History (35%)
• Amounts owed at the movement (30%)
• Length or size of the credit history (15%)
• Different types of credits (10%)
• Newly borrowed credits (10%)

FICO mathematical models divide the scores in 6 categories 760 to 849 (excellent), 700 to 759 (good), 660 to 699 (average), 620 to 659 (fair), 580 to 619 (poor) and 500 to 579 (bad). These scores are principally used to decide the approval of the loans and interest rates. The highest credit score possible, 849, gets the best terms of interest and also the least possible interest rate, while the bad credit score gets higher interest rates.

Thus, in order get the best possible interest rates and terms and conditions, start improving your credit score. Apart from that, also make it a point to use least possible credit facilities such as loans and credit cards as it will improve your scores. Lastly, make all payments of bills and installments, perfectly on time.