Understand what credit score ratings are, important terms related to credit rating scores and how it is calculated.
Credit Score Ratings Explained: What Do They Mean
Credit Score is the measurement of a borrower’s financial credit worthiness. This information is usually required for the lender to assess the risk involved in lending loan funds to the borrower. The borrower with good credit score can easily obtain better interest rates loan with lesser processing fees.
Additionally, the lender can determine terms like loan amount, down payment charges, and rate of interest that can be offered to the borrower based on his credit score. However, the credit score calculation is not based on criteria like age, race, income earned, religion, education, marital status, and job.
Meaning of Credit Score Rating
A Credit Score Rating indicates the repaying capability of a borrower based upon which the lender may sanction the loan amount. For gaining a good credit score rating, the factors listed below must be considered by borrowers.
· Capability to repay the loan funds
· Rate of interest charged
· Usage of credit amount
· Patterns of saving the income
· Patterns of spending the income
· Total debt owed
If a person wish to improve or to maintain his or her credit score should manage to keep his or her finances within the income scale.
How Credit Score rating are determined?
The mathematical calculations for measuring the credit score involves a large amount of financial data which is closely guarded by the Credit Bureaus and Fair Isaac Corporation (FICO). However, the credit history may not help the lender to understand how the borrower handles the finance lent by them.
Most borrowers do not have knowledge regarding the way of calculating the credit score which is usually carried out by the FICO and other Credit Bureaus. The calculation of credit score is too difficult for the public to understand.
Fair Isaac Corporation
The range of FICO credit score is from 300 to 850. A borrower whose credit score is 660 is considered to be potentially subprime. In the United States of America, the average credit score rating of the borrowers is 680. Lending institutions favor immediate loan debt offers to those borrowers possessing credit scores above 720.
30% of the credit score rating represents credit amount utilized, 15% represents the length of the credit history, 35% shows the punctuality of repayments, 10% the kinds of credit utilized, and remaining 10% the frequency of credit history.
In the United States of America, the three major credit bureaus are Equifax, Experian and TransUnion which calculate their own credit scores. The credit score ranges from 0% to 100%. However, the basic formula which they use for ascertaining the credit score is based on the FICO score.