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Resources   »   Credit Management   »   Understanding Credit Ratings    
Understanding Credit Ratings
Success Starts With Knowledge
 
We all know that good credit translates into lower rates for consumers and you need to know how to work the system to your advantage.  Understanding credit ratings is key to your success in building an excellent credit score.
 
What the credit scoring model seeks to quantify is how likely you are to pay off your debt without being more than 90 days late on a payment at any time in the future.
 
Credit scores range between 300 (very bad) and 850 (excellent).  The higher your score is, the less likely you are to default on your loan.  Only one out of approximately 1,300 people has a credit score of 800 or higher.  These are clients who walk away with the best interest rates.  On the other hand, one of eight prospective homebuyers are faced with the scenario that they may not qualify for the loan they want because they have a lower score, between 500 and 600.
 

  

Scores
Here's a simple chart to give you the tiering structure and what it means to the lender:
 
Credit Score
Lender Interpretation
720 - 850
You are at the top of the best rates and terms offered to you.
700 - 719
Excellent Score.  You are a very desirable borrower.
 680 - 699  
Good Credit.   You should be in good shape to buy.
660 - 679
Average Credit.  Don't look for other exceptions.
640 - 659
Borderline.  OK if everything else is strong.
620 - 639
Weak.  The rest of your life must be perfect.
600 - 619
Difficult.  Needs some work or a special program
Below 600
Trouble!  Try to fix your credit immediately. 


  

Five Factors Used to Create Your Credit Score
 
What the credit scoring model seeks to quanify is how likely you are to pay off your debt without being more than 90 days late on a payment at any time in the future.
 
Credit scores can range between 300 and 850.  The higher your score, the less likely you are to default on your loan.  Your credit score comprises five factors and they are listed below in order of importance, just as a lender will see it.
 
Payment History:  35% Impact.
Paying debt on time and in full has a positive impact, however, late payments, judgements and collections have a very negative impact.  Missing a high payment has a more severe impact than missing a low payment.
 
Outstanding Credit Balances:  30% Impact.
The ratio marking the difference between your outstanding balance and your available credit is important here.  Ideally, you should keep your balance below 10 percent of your available credit limit.  To maximize your credit score, keep your balance 30% below your credit limit.  Example:  If you have a credit card with a credit limit of $1,000, try to keep your outstanding balance below $700 for optimal scoring.
 
Credit History:  15% Impact.
This marks the length of time since a particular credit line was established.  A seasoned borrower is stronger in this area.
 
Type of Credit:  10% Impact.
A mix of auto loans, credit cards and mortgage is more positive than a concentration of debt from credit cards only.
 
Inquiries:  10% Impact.
This quantifies the number of inquiries that have been made on yur credit history within a six month period.  Each hard inquiry can cost from two to 50 points on a credit score, but the maximum number of inquiries that will reduce the score is 10.  Eleven or more inquiries in a six month period will have no further impact on your credit score.
 
One thing that is important to remember is that the credit scoring computer is not taking any personal factors into consideration when it calculates your score.  When lenders run your credit report, it is simply a snapshot of today's credit profile.  This can fluctuate dramatically within the course of a week, depending on your own activities.  Be aware of this when you go out on a shopping spree.  You need to make sure you are not creating a negative impact on your score while the lender is reviewing it.
 
 

  

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