Credit Score Rating-What is it? Many people wonder how lenders can let customers know in just a few minutes if they are approved for credit, using just their social security number. They may ever wonder why one friend may get one interest rate on a vehicle loan while the other friend gets a different interest rate. Well, it has everything to do with credit score rating. It is very important that consumers know where they stand on the scale. A good credit score rating can make a huge difference in the interest rates that customers receive on their loans.
Credit Score Rating Overview
Anyone who is considering extending credit to consumer uses a credit score rating to determine creditworthiness.
Fair Isaac Corporation created a credit scoring method that is the most commonly used method or rating credit. The score is better known as FICO, and it is a very good indicator of credit history.
The three credit agencies are TransUnion, Equifax, and Experian. Each has its very own version of the credit score rating. Experian calls their system Experian/Fair Isaac, Equifax calls their system Beacon, and TransUnion calls their system Emperica. When consumers apply for credit, the score does not come from FICO; it comes from the credit agencies.
A credit rating score of 680 seems to be the number that most lenders want their potential customers to have.
A credit rating score can range from 300 to 870. A better score comes with better interest rates. Those with a higher credit rating score are considered a lower credit risk in the eyes of lender. Some lenders take the average of all their credit rating scores to determine if they will extend credit to a potential lender. An excellent credit rating score comes in handy when consumers make big purchases such as homes and automobiles.
Consumers may be able to get a line of credit from lenders with less than a 680 credit score rating. Some lenders will extend credit to consumers with less than a 600 credit rating score, but consumers may have to pay very high interest rates to receive the loan.
How Credit Scores are Calculated
A good credit rating score or a bad credit rating score makes a huge difference when consumers approach lenders for loans. Low credit ratings come with high interest rates, and in some cases, denial of loans. No one knows exactly how FICO determines their scoring system, but here is an approximate breakdown of their scoring:
- Payment history makes up 35% of the credit rating score. This is the largest percentage of credit history that can have the biggest impact on a credit rating score. Recent credit issues have a bigger influence on a credit score. In addition, judgments, bankruptcies, and collection accounts affect the credit score as well because these accounts can remain on credit reports for as long as 7 to 10 years after they are paid.
- Credit balances account for 30% of a credit rating score. The rule is to keep credit card balanced less 30% on credit cards. Maxed out credit cards are not good for a credit score; it shows lenders that consumers are not responsible with their credit. Maxed out credit cards can generate late fees and over the limit fees that can keep credit card balanced high.
- The length of credit history accounts for 15% of a credit rating score. Lenders want to know how long consumers have had their accounts. A rule to remember, longer credit accounts help to raise a credit score. Closing the oldest credit accounts may lower a credit score.
- New credit makes up 10% of a credit rating score. Lenders want to see that their potential customers have the ability to receive credit from other lenders. The number of inquiries indicates the creditworthiness of customers. When consumers apply for credit, inquiries appear on their credit report. Credit scores are greatly affected by too many inquiries. Consumers should only apply for credit when they really need it.
- Credit use makes up 10% of a credit rating score. Lenders take a close look at how many accounts that consumers have. Current auto loans, mortgages, credit cards, and student loans are just a few of the types of accounts that consumers may have.
Consumers with the highest credit rating score have the biggest advantage when it comes to getting loans with good rates. Several factors affect the likelihood that consumers will receive credit from lenders. It is always important to know what factors affect a credit score because it can save consumers a great deal of money.