Credit rating refers to the credit worthiness of a person. A credit rating will inform a lender whether the person has the capability to repay a loan. A poor credit rating indicates that a person is high risk and may result in getting a high rate of interest.
In the US, people are signed credit scores by credit bureaus which determine a person’s credit rating and worthiness. This score is a three digit number known as FICO credit score. FICO scores are credit scores developed by Fair Isaac Corporation (FICO). Today FICO credit scoring is widely used and accepted by lenders as a reliable source of credit evaluation.
Credit scoring models are developed by analyzing statistics and picking out characteristics that are believed to relate to creditworthiness.
Credit score analyzes a borrower's credit history considering numerous factors such as:
- Payment history
- The length of your credit history
- The amount you owe versus the amount of credit available
- Types of credit used
There are three major credit reporting agencies: Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score to work out your loan application.
What is a good FICO score?
FICO scores range between 300 and 850. Credit scoring is rated as follows:
~ Excellent: Over 750
~ Very Good: 720 or more
~ Acceptable: 660 to 720
~ Uncertain: 620 to 660
A low credit score may result in a denial of credit. Furthermore, lenders will charge higher interest rates on loans to individuals with lower scores. This practice is known as risk-based pricing.
How To Remove A Negative Credit Rating
While it is difficult to increase your credit scoring over a short period of time, there ways of improving your scores.
- Always pay your bills on time
- Do not apply for credit very often
- Always try to reduce your credit card balance. Keep debt at the very minimum
- If you have limited credit, try to get more
While there is no doubt that good credit scoring is important, it is necessary to point out that FICO scores do not take into account your age, income, assets or employment history. Ultimately it all depends on the lender. Certain lenders pay close attention to income, assets and employment history.
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