A credit rating is a simple number that many lenders use to determine whether or not to extend a loan or line of credit to an individual. It is impacted by a number of factors, some of which are controllable, others not.
Lenders typically refuse credit to individuals with a credit rating of 500 or lower.
There are three main agencies that lenders turn to to obtain an individual’s credit rating: TransUnion, Equifax, and Experian. Many lenders receive two or more reports as the details may differ between agencies. Opinions differ as to which agency is the best or most accurate, with factions having strong opinions on both sides for all three main agencies.
Closing a credit card account on time can have a negative impact on your credit score, which takes into account the percentage of credit available and how long the accounts have been open.
The formula used by these three agencies is known as FICO, named after the Fair Isaac Credit Organization, one of the first companies to start using credit ratings in the 1950s. The FICO score is a number that ranges from 300 to 900 and approximates the risk that an individual poses to a creditor. A rating of 300 is considered extremely high risk, while 900 indicates virtually no risk.
Individuals with high balances on existing accounts and a history of bad debt will generally have a low credit rating.
The FICO score is calculated based on the percentage of your total credit you are currently using (approximately 30% of your FICO score), how long you have had open credit lines (15%), the types of credit lines you have ( 10%), the size of your past credit lines (10%) and the number of delinquent payments (35%).
As a general rule of thumb, a credit rating around 500 is a high enough risk that many lenders will decline a line of credit, and those who grant it will penalize the borrower with high interest rates and tough terms. A rating above 850 will grant you the lowest interest rates possible and a very small down payment where applicable. One of over 650 is good enough to get favorable terms and almost always be accepted for new lines of credit.
Having a good credit rating helps you get financing at a favorable rate for the purchase of a new vehicle.
Many organizations offer online access to your credit score. These sites offer reports from the top three agencies, detail why your score might be low, and offer suggestions on how to improve it. This ready access to credit information has led to the emergence of many online forums and communities where members encourage and help each other to increase their ratings.