Credit Score Scale Review-Credit Score Scale

Credit Score Scale - Measuring Your Financial Future

Your credit score will have a huge influence on your financial life. Your success rate in securing a loan, mortgage or any form of credit and the rate of interest you will pay, hinges greatly on where you rank on the credit score scale.

We live in a society where credit has become an intrinsic part of the worlds economy. We use credit to buy food, vacations, cars and even our homes. In many circumstances, people have become so dependent on credit, that they can no longer live without it.

With the widespread use of credit it is amazing how very few people know about the credit score scale - what it means and how a 3 digit number can impact their financial future.

This credit score scale guide will help you address this issue by outlining how the scoring system works and affects you.

What Is The Credit Score Scale

The scale is used as a benchmark by financial institutions that include bank, insurance companies and credit card providers to determine the risk involved in lending borrowers money. It is like a risk assessment that determines the ability of a person to pay back the loan.

To give a persons score meaning it is measured or ranked on a scale. The scale will have a credit score range between 300 and 850. This number range is based on the Fair Isaac or FICO system which is most commonly used by the main credit bureaus and lenders. The position you rank on the credit score range will determine how easy or difficult it will be for you to obtain a loan or mortgage.

The higher up the scale you rank improves your chances of securing the best deals on lower interest rates because the banks will see you as a lower credit risk. In contrast a person with a lower score will be deemed a greater risk and their chances of having their credit applications accepted is greatly reduced. Even if they are successful with their application the cost of borrowing will be higher.

Why Is The Credit Score Scale Used

Banks are in business to make a profit therefore, they want to attract borrowers that can make them the most money. Lending money to a person whose credit history indicates they have a habit of missing payments and defaulting on loans would not be a very profitable move on the part of the lender.

With the credit rating score scale banks can make a pretty accurate estimate of whether a potential borrower is a good or bad credit risk. The idea of weeding out high risk borrowers may seem draconian to some people. Although, the key aim is to improve the chances of the bank making money, preventing people who are irresponsible with debts can only be a good thing as it prevents them falling further into debt.

How Credit Scores are Calculated

When you apply for a loan to pay for a new car the bank or lending institution will request a copy of your credit report from each of the three collection agencies. What is contained in your report will help the lender determine whether they should or should not allow you to borrow money.

Your report is a very important and revealing document. The report goes into detail about your financial history, spending habits, credit record, the levels of debts you owe and any negative records that relate to missed payments, loan defaults or bankruptcy. With this information lenders can see how well you have managed your finances in the past and this helps them to predict how well you will manage your debt in the future.

This information is compiled and compared against a number of other factors within your report to determine your level of risk in terms of your ability to repay the loan principal and interest over a specific time period.

In order to make sense of all the data the credit bureaus boil it down to a simple 3 digit number and this becomes your credit score. Your score places you into a specific risk category. People with a good credit score are considered low risk borrowers whereas, a low score denotes a high risk borrower.

The credit score chart below illustrates the following factors that are used to calculate your score;

Criteria

Weighted %

Credit payment history

35

Total level of debt

30

Duration of credit history

15

Types of credit

10

Number of inquiries

10

As you can see from the chart the length of your payment history and the amount of debt you owe contribute to 65% of your score.

Different Scoring Systems

There are 3 agencies that collect your financial information and determine your financial risk. They are Equifax, Trans Union and Experian. Although these organizations do the same thing they actually use different methods to calculate your score which can result in different results between the three.

In order to simplify this issue each agency has agreed to use a joint system to align their results. This new combined scoring system is called the Vantage Score which uses number scale ranging between 501 and 990, compared with the more commonly used FICO scoring system which uses a scale range between 300 to 850.

Within the Vantage Scoring model each range has a a sub-set scale which is graded by a a letter with the highest score having the letter A (801 - 900) and the lowest range is given F (501 - 600). Very similar to the old school report cards.

When using the FICO credit score ranking scale it is considered that if the range falls within 675 to 700 you have a good credit score rating. With the Vantage credit score ratings scale this would be comparable to a C grading which is a range between 701 - 800.

Credit scores below 650 are considered high risk which can lead to difficulties in obtaining loans or paying higher interest rates.

Even if you have a good credit rating score scale it always pays to make the effort to improve it to get a higher score. For, example a range above 720 based on the FICO system is the best credit rank and this increases the opportunities to have access to a greater range of loans with preferential interest rates.

The Vantage score vs FICO score situation has been debated for quite while. The key question many people ask is which one of these 2 credit scores should I be be checking. The simple answer to that question is to ask your lender the version they will using to grade you.

How To Rise Up The Scale

Lenders are becoming more cautious when it comes to lending and improving your credit score is more essential than ever before. If your score is low then, there are changes that you can make to increase your rankings. As pointed out earlier. Your credit history and the levels of debt you have are the two biggest criteria that can impact your score.

You should check your credits reports, which you can do now for free, on a regular basis for any entries that are either out of date or incorrect. If you have missed payments or defaulted on a loan this has got to stop as lenders will not lend to you or they will charge you extortionate interest rate charges. Therefore, pay your bills on time and keep your overall debt levels low.

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