The Credit Score Rating System Demystified

credit score basics

Separating Fact from Fiction For Consumer Credit Score Ratings …

When you request your credit score or report, you will find that the way your credit is weighed by the respective credit bureau is very complex and not at all transparent. In fact, most people have no idea what their credit score rating represents or what the entire respective credit score scale means.

Before delving into each section of the credit score range, you must understand how your rating is calculated.

Understanding The Need For Consumer Credit Score Ratings

the credit score scale

Credit scores are a quick way for financial institutes to judge the financial commitments that they make to borrowers. When you borrow money from a bank or credit card company, your score will be assessed to determine the risks a lender is taking by providing you with a loan. This number is needed in order to provide a quick snapshot of your value on the “market” in the eyes lenders. A better way to think about it, is that this rating represents your credit worthiness. With a poor credit rating, you are not very worthy of credit in the eyes of banks and other financial institutions.

If you have paid your bills on time and do not have a massive amount of financial debt, your score will be higher and you will have an easier time receiving loans and credit.

However, if you have too much debt to handle, too much open credit or you frequently miss payments, your score and credit history will reflect this.

The higher that a person’s credit rating is, the less likely they will not uphold their financial obligation to repay a lender.

Credit scores may:

  • Affect your interest rates when taking out a loan
  • Be a determining factor in receiving a loan
  • Be checked by a potential employer
  • Make refinancing a mortgage easier
  • Add negotiating power when talking to lenders
  • Open up new credit opportunities

A credit reference will be used by all major financial institutes to assess your financial responsibility. Understanding what your score is used for will help you better understand what your respective credit score ratings mean to you.

What Your Score Range Means

The score that you have may or may not be harming your ability to get a loan, increase your interest rates or have a negative effect on your ability to land a job.

When you receive your credit score ratings, you will need to know what your credit score range means.

The following ranges are seen:

  • Excellent: A score of 740 – 850 is considered excellent. Anyone that falls within this range will enjoy the lowest interest rates of all lenders. The mortgage rates for this bracket will be 3.9 percent, auto loan rates of 5.1 percent and credit card rates of 7.99 percent.
  • Good: Defined by a score of 680 – 740, good credit also receives great borrowing benefits. However, credit card interest rates are nearly 4.3 percent higher in this range than in the excellent range and mortgage rates are .3 percent higher.
  • Acceptable: The acceptable range will be a score of 620 – 680. This range will see major increases in interest rates from those with good credit. Mortgage rates are .7 percent higher, car loans will be 4.5 percent higher and credit card interest rates are typically 13.9 percent.
  • Subprime: Lenders start to take a major risk in the subprime tier of 550 – 620. This is when mortgage rates reach 8.6 percent, auto loans reach 17.9 percent and credit card interest rates hover around 19.8 percent.
  • Poor or Bad: Those that have a credit rating of under 550 will be categorized as high risks by lenders. Mortgage rates of 9.5 percent, auto loan rates of 18.9 percent and credit card rates of 28.9 percent are common for a person with bad credit.

Lenders will use the FICO standard for their credit score ratings among other financial factors. It is important to note that the credit categories listed may have their score ranges differ from one lender to the next. As few as a 10 point increase or decrease may be seen.

For the US consumer that must have a credit reference provided for any major financial loan, the range that your credit score falls into will have a major factor on your interest rates.

From the above categories, based on a $160,000 mortgage, a borrower will pay the following in interest on a typical 30 year mortgage:

  • Excellent: $89,000
  • Acceptable: $117,000
  • Poor: $259,000

As you can see, a person with poor credit pays nearly 3 times the interest than a person with excellent credit. If you value your money and want to stop paying more money than you are required to, you must take a long hard look at your credit score ratings.

How to Raise Your Credit Score

Raising your credit rating is not as difficult as you may think. While most people state that raising your score is hard, it is all a matter of how diligent you are with your finances and your dedication.

Anyone that falls on the poor credit score scale or simply wants to raise their score should:

  • Monitor Their Credit: Credit monitoring allows you to dispute any false charges once they are seen. If an error has been made, you will be able to correct the error before it drops your credit score. Financial institutes do make vital mistakes and you will be the one paying for them.
  • Fix Errors: If you have a lower score than you believe you deserve, this may be due to errors on your report. Comb through your report for any open credit that you may not have authorized. You will need to be dedicated to have these errors remedied, or you may even need to call a law firm for help.
  • Set Up Alerts: Are you the type of person that forgets to pay your bills? Account alerts will notify you when a bill is due so that you never miss another payment. With payment history equating to 35 percent of your score, you cannot afford to miss a simple payment.
  • Call Lenders: If your bills are too high and you keep missing payments, call a lender and discuss your situation with them. Oftentimes, lenders are flexible and new payment schedules can be made, or they may lower your rates. This will help you get back on track and raise your credit score.
  • Reduce Debt: If your credit cards are almost maxed and you have too many loans out, this will lower your credit. Start paying off debt, ideally the lowest balance first, and continue to tackle your debt.