Credit Rating

Back in the late 1950’s, a company named Fair Isaac came up with a way to assign a number to consumers that would reflect their credit worthiness which we know today as the credit rating. It is a three digit number that tells prospective lenders if you are a good credit risk or a bad credit risk. Your credit rating makes the difference between whether or not you can get a line of credit or a loan.

The credit rating is a snapshot of everything you’ve ever done regarding the use of credit and your payment history. Fair Isaac Company (FICO) compiles all of this information and then applies a complicated mathematical formula that calculates your credit rating. The formula is not public knowledge and this is done with the blessing of the Federal Trade Commission.

The average credit rating for an American today is 720. Basically, the higher your credit rating is, the more credit worthy you are and the less problem you’ll have obtaining credit and loans. However, there are also many, many people with credit scores that fall below the 630 mark which means they are a credit risk and are likely to be denied credit just because of this rating.

While some don’t like the idea of their whole financial history being scaled down to one three digit number, but in the financial world, the credit rating does rule the awarding of credit. If you want to buy a home or a car or even secure a line of credit on a credit card, you will have to have a credit rating of at least 675 if not higher.

Bad Credit

The words “bad credit” conjure up such negative images, don’t they?  That’s because those two little words aren’t exactly what people want associated with them.  When you have BAD CREDIT, you are almost marked when it comes to obtaining things like cars and homes.  It’s like you’re wearing a sign around your neck proclaiming that you got into trouble with credit and now you have BAD CREDIT!

How do we define bad credit?  Well, most financial lending companies will classify you according to your credit score, also known as your FICO score.  This score is calculated using a highly secretive formula developed by the Fair Isaac Company and kept under lock and key with the Federal Trade Commission’s blessing.

FICO will evaluate your credit history and then assign you a three-digit number that determines your credit worthiness and your ability to repay any loan you are applying for.  It doesn’t reflect who you are as a person, it reflects your past payment history when it comes to your debts.

You are considered to have bad credit if your FICO score is less than 620.  The median credit score for most Americans is 723, so anything less than 620 virtually guarantees that you will not be approved for a loan you might be seeking.  That’s because you are considered to have a bad credit history and seem to be unreliable in paying back your debts.

Good Credit

What does it take to get a good credit rating score?  Well, first it takes time.  Having good credit doesn’t happen overnight.  You’ll need to actually HAVE credit before you worry about a good credit rating score.  To do that, you may want to start out small with a department store or gas credit card.  These are relatively easy to get.  Once you have the card, charge some small items and then pay the bill off in full for several months. We must caution you here – don’t charge more than what you can pay off in full.  If you carry a balance, it won’t reflect well on your credit report.

To get a good credit rating score, the most important thing to remember is to pay on time.  We can’t stress this enough.  Most companies that extend credit to you will allow you a grace period to make the payment.  For example, if your payment is due on the first of the month, they usually tell you late charges will occur if you pay after the 13th.  So essentially, you have between the 1st and the 13th to make your payment.  While this sounds great, if you wait until the 13th to make your payment, this really can reflect poorly on your credit report.  So if your bill is due on the 1st, pay it on the 29th, 30th, or 31st of the previous month just to be sure.

A great way to insure that you are making on-time payments is to have them deducted directly from your checking account.  This alone will contribute toward a good credit rating score because it shows fiscal responsibility.  Plus, it insures that your payments are made on time and you won’t miss any payments.  Of course, you’ll have to be sure there’s enough money in your account to cover the payments since credit bureaus also look at your checking accounts.

Getting and maintaining a good credit rating score is actually quite easy when you set your mind to it.