Credit Report Rating

By: EconomyWatch   Date: 25 August 2009

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A credit report rating is a number derived from an individual’s credit report, which reflects the person’s borrowing, charging and repayment activities. This rating is used by lenders to determine the credit worthiness of the individual and decide whether it is safe to provide a loan or a line of credit.

Items Affecting the Credit Report Rating

Your credit report rating is affected by the following factors:

  • Payment history: A good record of on-time payments will help raise your credit report rating.

  • Outstanding debt: If your outstanding debt is higher than your credit limit, it will have an adverse affect on your rating. For least possible impact on your credit rating, your outstanding debt should not exceed 35% of the total credit limit.

  • Credit account history: If you have an established credit history, you would be considered a less risky borrower. Hence, you must think twice before closing old accounts prior to submitting a loan application.

  • Recent inquiries: When a lender or financial institution contacts your credit reporting agency (CRA) to verify your credit, it causes a hard inquiry. This creates a dent in your credit score.

  • Types of credit: A healthy credit profile must have a balanced mix of loans and credit accounts.

 

Credit Report Rating: How is it calculated?

Most CRAs use the FICO, named after the Fair Isaac Credit Organization, to calculate credit report rating. Fair Isaac Credit Organization was the firm that began using credit ratings, also called credit scores, in the 1950s. A FICO score ranges from 300 to 900 and indicates the risk an individual might pose to a lender. While a rating of 300 is considered highly risky, that of 900 represents virtually no risk.

 

Credit Report Rating: How much is acceptable?

As a thumb rule, you would be considered high risk if your credit rating is about 500. Many lenders would refuse to provide you a line of credit and those who agree would penalize you with high interest rates and tough terms. A credit rating of more than 650 is considered good and you would be able to get new lines of credit, such as loans, mortgages or credit, on favorable terms.

Meanwhile, if you have a credit rating of more than 850, you will be granted the lowest possible interest rates. You would also not be required to pay a high down payment, if you are taking a loan for a car or house.

 


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