Last Post On : July 28th, 2013 - Sunday
How To Improve Your Credit Score?

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How The Credit Score Chart Works?

A lot of people who apply for loans get nervous when they hear the words; “credit score”. There is a strong connection between getting a loan and having the right credits scores. A lot of Americans live on credit. Every month, millions of people pay off a certain installment of the loans they have taken out. This is part of the present day reality. The point here is that people who live on credit need to be considered credit worthy or else they will no longer have access to credit. This is where things like credit score, credit history and credit reports come into the picture.

A credit score chart can be described as a technique used to determine whether an individual who wants to borrow money can repay the loan within a specific time frame. This chart is based on statistics. It is usually done by carrying out an evaluation and an analysis of the previous credit history of the person who wants to borrow money.  In simple terms, the credit score chart is just an expression of an individual’s credit worthiness expressed in purely numerical terms. People who score high on the credit rating will be able to get loans easily. People whose rating is poor may not be able to get loans at all. In some cases, people with bad credit reports may get loans but they will have to pay much higher interest rates because lending money to them is a huge risk. These are some ways the credit score affect the person who wants to borrow money.

To some financial analysts, it may sound unfair that people cannot get access to loans just because they do not get good credit ratings. Fortunately for the prospective borrower, the credit report is not the final word. Apart from the credit rating, there are other factors which banks and other financial institutions consider before granting or refusing to grant a loan. Again, credit scores are handled by three reputable firms in the US. This means that it is actually possible for the same individual to get different scores from the three credit rating firms.

At this point, it has to be stated that there are many online firms which claim to carry out credit assessments for people who want to know their credit scores. The truth is that the words of these online outfits do not carry much weight. The three firms whose reports carry a lot of weight are TransUnion, Equifax and Experian. Each of these firms may have slight differences in the way they rate people and this is why it is possible for the same individual to have slightly different credits scores from the three outfits. For all that, it is important to note that these rating firms operate within the same parameters. There is a software program developed by the Fair Isaac Corporation (FICO). The three rating firms mentioned above use the FICO software as the basis of their evaluation. This is why credit scores are sometimes called FICO scores.

The actual credit score rating based on the FICO scale comprises a series of numbers from 300 to 850. People who score 760-849 have an excellent rating. 700-759 is considered great; 660-699 is good while 620-659 is just fair. A credit rating of 580-619 is poor while 580 and below is considered very poor. As stated already, the credit score chart is not an oracle. It is just a guide because the decision to lend or to refuse to lend lies with the money lender. Most money lenders will grant loans to people with excellent scores (750-849). People in the 700-759 brackets can also get loans without much difficulty. For people with credit scores below 660, acquiring a loan may be a bit difficult but then it is not impossible. The thing is that people in this category will pay slightly higher interest rates because of the risk taken by the money lender in giving them loans. The message here is quite simple. People with very good credit scores will not find it difficult to get loans. Those with very poor credit scores will need to work on their credit scores. With the right credit repair options, people in this category can get better ratings after a while.

Contrary to what a lot of people may think, the credit score chart is not all about figures and statistics. Credit scores have a lot to do with cash, earnings, spending habits and the integrity of the person involved. Some factors are used for finding credit scores include payment history, outstanding current debts, length of credit history, types of credit accounts owned and new credit applications.

It is easy to understand why payment history can be a factor in arriving at credit score ratings. When people borrow money they are expected to repay the money in accordance with the terms of the loan. Prompt repayment is an indication of integrity and this is why payment history takes 35% of the rating. Outstanding current debts takes up another 30% of the rating and again, this is quite easy to understand. Every normal person is expected to borrow money and owe money at some point in time. Having too many outstanding debts is a bad sign because it may imply financial recklessness on the part of the person in question. On the other hand, having a few outstanding debts may be good for the credit rating of the person in question if the loan repayments are being made at the right times. Length of credit history is used to determine how long the individual has been borrowing (and presumably, repaying money) and this takes another 15%. Types of credit accounts owed take 10% and new credit applications take another 10%.

Reduced to the barest essentials, the credit score chart is not rocket science. It is simply a confirmation of the fact that money lenders are not gamblers or charity organizations. Banks and financial institutions are in business to make money. For this reason, it makes sense for them to lend money to people who have good credit ratings. This is one of the ways to ensure that the loan will be repaid.



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