Credit Score Scale : Understanding the Credit rating system

Credit Score Scale and Credit rating system

Do you know that what is Credit Score Scale? How useful Credit Score Scale to us?  Let us know about Credit Score scale and its rating system.

What is Credit Score Scale?

A very simple meaning “Credit Score Scale is a number representing the creditworthiness of a person.”

Credit Score Scale shows us that a person will pay his or her debts or not. While there is no definitive scale that all lenders use but it is well known that a high credit score is best. It is useful to those one who planning to apply for a loan, knowing where they lie on a scale can help them know what to expect.

Credit rating system 

Why it is important to understand the credit score scale? Because whatever major financial decision you make is linked to your credit score. Here I show the rating system and what is considered a good credit score.

The most commonly used credit score scale is FICO score. It is a three-digit number that ranges from 300 to 850. In this rating higher number considered as better credit rating. Better score ranges from 720 to 850 then 725 are considered good while those which are below 600 are considered bad.

The good news is that a buyer with a FICO score of 722 can get just as good an interest rate on an auto loan as someone with 848. It is true for every credit score range.

The credit score ranges are as follows:

• 720-850: Best Credit or Prime Credit
• 700-719: Good Credit
• 675-699: Marginal Credit
• 620-674: Sub-Prime Credit
• 560-619: Poor Credit
• 480-559: Very Bad Credit

How exactly is your score calculated?

FICO score consists of these five major components:

1. Paying on time (35%): This is the most significant component of your credit score. Your payment history includes the number of overdue payments, their amounts, and whether the accounts were repaid as agreed. More issues considered lower score.

2. Amount owed and proportion of the credit lines (30%): This factor includes the total amount of your debt by account type like mortgage, installment, revolving, etc.
 For credit cards, the proportion of credit lines used is what you currently owe in relation to your credit limit. In case of installment loans, this amount is what is remaining to be paid in relation to the original amount of the loan. The lower the ratio of what you owe to your credit available, the better. So having credit cards with no balance or low balance will raise your score.

3. Length of your credit history (15%): This means the number of years you have been using credit and the type of accounts that you have.

4. The mix of credit accounts used (10%): It has different types of credits used. If you mostly use riskier types of credit, such as revolving credit or finance-company loans, that means a lower score, than if you mostly have mortgage or student loans.

Here lenders will examine more closely your history the type of loan that they are planning to extend to you, so a credit card company will look closely on your payments of credit card debt, and a mortgage provider examine how you repay your mortgage or other secured loans.

5. The number of new inquiries and newly opened accounts (10%): It includes the number of credit inquiries you made in the last six months or so, any increases in credit limits that you requested, and the types and number of new credit accounts you have. Applying for several accounts at the same time will lower your score, because you may not be able to afford yet another loan.