Credit score rating is a summary report of an individual or company’s credit score indicator based on their credit worthiness, computed by using certain formula. The system was first introduced by Fair Isaac Corporation of California and is alternately called FICO Ratings. Credit rating report is an excellent prediction model to measure the risk involved in granting a loan to a specific company or individual.
Lenders put much value on the this report before loans are approved. A higher credit score rating equates to a higher chance that the loan will be approved.
Many factors are considered to measure the credit worthiness of loan applicants. This includes habitual delinquency in loan payments, age of the debtor account, credit facility usage history, frequency of credit requirement and type of loan taken.
Habitual delinquency in the payment when due greatly reduces the credit score ratings. It is implicit that such activities shall continue in the future and the applicant is therefore a high risk borrower. FICO rating system also favors borrowers with a long loan history as compared to someone who is applying for credit for the first time. Having a history of mishandling like frequent use of credit line and over-extending credit cards are considered undisciplined behavior and a negative indicator. Lastly the type of credit that an individual is currently utilizing also has an effect on his rating. A credit card because of potential for abuse by multiple loan utilization is considered riskier than a straight loan.
Credit score ratings are reasonably accurate in giving a summarized idea if the borrower is a good risk. But even lenders may sometimes look at it from diverse credit worthiness considerations. A credit card company might be interested on short term repayment and loyalty history while a mortgage broker should look at an individual’s long term repayment capabilities. Since they are relatively accurate and fair, an individual can use his rating to study his own credit value. Knowing this can be a big advantage and can be used to get preferential deals during negotiations.
Credit scores range between 300 to 900 on the FICO system and a rating of 600 to 700 are most common. Applicants scoring below 500 are considered unacceptable. Scores of 500 to 620 gets a very poor rating with those getting below 560 having a very slim chance of having a loan granted. Those gaining above 560 to 619 will have a better chance for approval but would still be burdened with high interest rates. Ratings of 620 to 659 are considered good but will still have to pay higher than the market rates. Those scoring above 660 should not have any trouble in getting their loan approved. The terms of the loan would be less harsh and the rates should be reasonable. They will continue to get better deals as their credit score increase. Although the credit rating score goes up to 900, the best credit score possible is 849.