Loan Guide For Consumers

 

Importance Of Obtaining And Maintaining Good Credit

The importance of good credit is quite evident, as people today have become increasingly dependent on credit. Therefore, it is very important for you to have a good understanding of credit rating and personal credit reports. You must know how a credit score is determined, what role it plays in your finances, and how you can obtain and maintain good credit rating.

What Is Credit Score?

A credit rating or credit score is a statistical method that is used to determine whether the applicant is financially sound enough to pay back the loan amount or not. The likelihood of the applicant to pay back the borrowed amount is basically determined on the basis of the credit history of the borrower. It means if you have ever defaulted in the repayment of your existing or previous loans, it will adversely affect your credit score. On the other hand, if you have always made the repayments in a timely manner, you are very much likely to have a good credit score.

What Are The Evaluation Systems For Credit Score?

There are three major credit bureaus in the United States of America that issue credit scores. These credit agencies include Experian, TransUnion, and Equifax. Different agencies use different evaluation systems. There are several factors that are taken into consideration in order to determine credit score. Some of the primary factors include frequency of applications for new credit, credit type mix, time length of credit history, current debts, and credit payment history.

Credit Score And FICO Score

The term credit score is also referred to as FICO score. FICO is an acronym for Fair Isaacs Corporation. The software program used to calculate credit scores has been developed by this corporation and that’s why the term FICO score is also used in reference to your credit score. Both the terms are synonymous. 

Credit Rating Description

Following is a brief description about different credit scores.

  1. R0 or I0 - Insufficient credit history. You are new to the world of credit.
  2. R1 or I1 – It means you have been paying your credit back in one month.
  3. R2 or I2 – It means you have been paying your credit back in two months.
  4. R3 or I3 - It means you have been paying your credit back in three months.
  5. R4 or I4 - It means you have been paying your credit back in four months.
  6. R5 or I5 – You have been unable to repay the loans in four months.
  7. R7 or I7 – You have used a debt consolidation system to pay off your debts
  8. R8 or I8 – You have paid off your debts by selling the item.
  9. R9 or I9 – You have a bad credit score. It means you cannot repay your loan at all.

There are five major components that constitute a credit score - pursuit of new credit (5% weighting), types of credit available (15% weighting), time credit has been in use (15% weighting), current level of indebtedness (30% weighting), and previous credit performance (35% weighting).