Interpreting Credit Rating

Your credit rating, simply put, is a statistically derived measure of your credit worthiness. This score is used by lenders to decide on whom to offer loans to and under what terms. Typically, a higher credit rating tells prospective lenders that you are financially healthy and that indicates to them that you are less likely to default on your loan in the future. Lenders are thus happy to lend to you at low rates of interest because they know that their money is not likely to be under risk. If on the other hand, you have a low credit rating, that tells lenders that you have a problem handling credit and they may not be quite so eager to lend to you. Thus, a good rating can make all the difference between getting a mortgage on great terms and not getting a mortgage at all. But how is this all important credit rating calculated? The credit rating that is normally used is the FICO score, developed by the Fair, Isaacson Company along with the major credit bureaus. The FICO score is calculated using a complex model that employs data on your credit history and your current credit accounts. Factors that are taken into account include the amount you owe, any delays in payment, any delinquencies, the number of accounts with balances etc. Obviously different factors influence your score to different extents. A few delays on credit card payments will not impact your score by much, but a delinquency certainly will. Finally, how does one go about interpreting credit ratings? Well, a credit rating can be anywhere between 300 and 900. Different lenders have different levels of cut-offs. However, in general, a score of 650 or above indicates a very good credit history and people with these scores can usually obtain credit quickly and on favorable terms. Scores between 600 and 650 indicate basically good credit but with some risk. People with scores in this range have can obtain credit at a good rate, but may have to provide additional documentation to the lender before a large loan is approved. A score less than 600 indicates a credit risk. You may still get your loan but may have to pay a high rate.

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