The Importance Of Your Credit Rating

With the rise in credit card usage, more and more people are becoming highly dependent on credit. In order to maintain your credit worthiness, you should understand the importance of your credit rating. In this article we will explain all the basics about credit rating and why it is important.

Whenever you borrow using your credit card, you promise to pay it back in a stipulated time frame. A credit score is a person's credit worthiness measure. It determines the likelihood that a person will pay back the amount borrowed by him. The credit bureaus have different evaluation methods to calculate a person's credit score. They take into account, the person's credit history, payment history, frequency of credit and payments, credit types, etc.

In U.S there are three major credit bureaus - Equifax, TransUnion and Experian. Since, they give different weight-age to the various parameters, credit score for an individual by these agencies might be different. A FICO score is the term used to refer to a credit score. FICO is the acronym for the Fair Isaacs Corporation, who created the software used to calculate credit scores. The score range is 350 to 850 of which 350 is extremely risky and 850 is low risk.

Apart from the FICO scores, a personal credit number is also used in U.S and Canada. The number ranges from 0-9 and the numbers are preceded by one of two letters. The letter "I" stands for installment credit like home or auto financing and "R" signifies revolving credit such as a credit card. The creditors issues their own credit rating for borrowers. R1is the best credit rating while R9 is the worst. However, these days it is stressed to move towards a single way to rating like FICO to maintain uniformity.

What Makes Up Your Credit Score?
When a person borrows money, the lender sends the information to a credit bureau. The information includes details about how you handled your debt. This information is used by the bureau to determine a credit score based on five major factors:
1) past credit performance
2) present indebtedness
3) period of credit
4) types of credit available
5) pursuit of new credit.

Why Your Credit Rating Is Important ?
Credit ratings and scores are checked when you apply for a credit card, mortgage, etc. If your credit rating is not good stores will not accept your cheques, banks will not issue credit or debit cards. Your credit score helps lender determine your credit worthiness.

For an increased credit risk lenders add at risk premium to the price at which money is borrowed. So, if you have a bad poor credit score, lenders will lend you money at a higher rate than normal.

The Bottom Line is the credit has significant importance today. One cannot afford to overlook it as it will prove detrimental to one's financial health. If is also impertive you have an idea of how your credit score is calculated. By being aware of your credit health only you can take care of your credit ratings and score.