A credit score rating scale is made up of numbers that represent different things. Factors that influence the composition of a credit score include past payment pattern, outstanding debt, period of time over which the credit history has been maintained, balances on the credit report, and number of credit applications. In effect, the credit report is the basis of the credit score rating scale.
The credit score rating scale considers a score above 700 to be exceptionally good. This score makes it easy to avail credit at very reasonable interest rates. A score of 650 can be pushed up with some application. A score between 450 – 650 will not let the individual obtain an unsecured loan. A score below 450 means that the individual is unlikely to get any type of credit and is in serious need of credit counseling.
Often, the computational methods used by credit bureaus differ, which results in variations in credit scores for an individual. However, the most commonly used credit score rating scale is the one developed by the Fair Isaac Corporation (FICO). The term FICO rating is used as an eponym for a credit rating, although there are other rating systems available in the market.
The credit score rating scale arrives at its figures using statistical data, research, and comparative mathematics. The research helps creditors in evaluating the credit risk associated with an individual. The information gleaned by studying general patterns of borrowing and repayment by individuals that answer to a given profile is useful in establishing benchmarks that are referred by creditors.
The credit score of an individual does not reflect his ability or lack thereof in handling his finances, it only enables lenders to get an idea of the loan repayment capabilities of a person. Thus, if one wishes to obtain loans at good interest rates, then he has to work on creating an impression of reliability by getting a good credit score.
Credit bureaus that compute credit ratings obtain their information from various sources such as credit card companies and lending institutions. The bureaus have files on individuals, these files are updated as and when a person executes a financial transaction and his score moves up or down the scale depending upon the nature of the transaction.
Factors such as recent credit activity, length of debt, and debts not cleared affect the credit score of a person; however the income, age, race, and gender are not considered while computing the credit score using a formula, which is not made public. The credit score rating scale has numbers from 1 to 9. The risk posed by a potential borrower to a lender increases with the number. The credit score rating scale considers both installment credit and revolving credit. Since an individual’s credit score may vary across the three major bureaus, namely TransUnion, Experian, and Equifax, financial institutions obtain scores from all three bureaus and compute their own ratings.
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