Knowing where your credit is on the credit score scale is important. Depending on your rating and ranking, you will receive lower interest rates and are more likely to be approved for loans and credit cards. There are three credit reporting agencies – Exporian, Equalfax and GoodTrans. Each has its own way of calculating the rating, but overall, the results are similar. Generally, a company will check the credit report as a whole but will pay specific attention to the credit rating. This makes understanding your credit rating all the more important.
Credit ratings and what they mean
Lenders generally use the ratings below to determine where we stand in terms of credit score and what rates they will offer us.
- Excellent (Scores 780+) – People with a rate of 780 or more will enjoy the best interest rates. In addition, they are typically always approved for a loan.
- Very good (Scores 720-779) – A rating in this range is considered almost perfect and people who are there will also enjoy better rates than the average.
- Medium (Scores 680 to 719) – Although a score in this range is still considered good, individuals with this score will receive slightly higher interest rates than those with higher scores. According to Equalfax, at the end of 2012, the national average credit score was 696.
- Poor (Scores 580 to 679) – A score in this range indicates that the individual is a high risk borrower. It can be difficult to obtain loans and if approved, the interest rate will be much higher.
- Very poor (Scores 579 or less) – With a score in this range, you are rarely approved for a loan of any kind, but the credit is still repairable.
Factors that influence a credit rating
Typically, there are five factors that determine the calculation of a credit score, but three of them account for 81% of the total. These factors are:
Recent credit (30%) – indicates when the credit report has been verified and shows that the customer is still asking for more credit. This shows a risk for those who already have a large amount of debt.
Payment History (28%) – Determined by repayments made to lenders or creditors. This reflects whether the customer pays his loans regularly on time.
Use (23%) – Demonstrate how much debt is in existence.
The most important aspect of credit is that it can get better or worse. This makes loan payments on time more and more important for someone planning to apply for new loans or a mortgage in the future. In addition, lowering its overall debt will also increase a credit rating systematically.