Before you decide to shop for a home, buy a car or apply for a credit card, you should consider examining your credit report. Based on your current credit score, which determines your credit rating, lenders, such as banks and loaning agencies, will decide how low or high to set your interest rates. A low credit rating will cost you significantly over time, while a high credit rating can save you considerably in the future.
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The Fair Isaac Corporation started the credit rating system in 1958, developing an algorithmic way of predicting credit value based on a borrower’s previous credit history. Over time the credit system grew in popularity. As of 2009, lenders from across the world employ adaptations of the original credit formulas to determine, with better accuracy, which individuals are most likely to return payments on a loan or credit.
Features of a Credit Rating
Your credit rating depends on the value of your credit score. In the FICO system developed by Fair Isaac and Company, credit scores range from 300 to 850 points, where 750 or higher represents good credit. Fifty percent of borrowers fall in the “good” credit range according to the FICO website. Another scoring system called VantageScore grades people on a 501 to 990 point-system where 501 to 600 represents an “F” credit score, 601 to 700 represents a “D” continuing until 900 to 990 represents an “A.” Despite differences in the value of the scores, an 801 to 990 VantageScore is comparable in credit rating to a 750 or higher FICO score.
Definition of a High Credit Rating
The exact value that puts you in the category of “high credit rating” varies according to sources. For example, a “Reader’s Digest” article reported on the effects of credit scores on interest rates, and in terms of a mortgage, a FICO score of 760 or high puts you in the “high credit rating” bracket where rates are at their best. At the same time, a FICO score of 720 or higher gets you the best deal on a car loan. Moreover, an April 30, 2009 “Newsweek” article says that once you break 750, you’re at the top. The article even points out that an 800 score or higher, held by approximately one out of every eight borrowers, does not improve your deals on credit cards or mortgages; exceptional scores of 800 and higher are merely for the perfectionists.
Achieving a High Credit Rating
The “Reader’s Digest” article suggests ways to impact the factors affecting your credit score in order to improve your ratings. To start with, set up automatic payments on credit cards and loans. Borrowers who never miss a payment have higher credit scores. Secondly, use no more than 9 percent of your available credit. That is, if you have three credit cards, totaling a credit line of $3,000, then keep a debt of no more than $270 (0.09 x $3,000).
Payment history and percentage of credit debt affect 65 percent of your score. The remaining factors include the duration of your credit card account (the longer the better), the number of credit score inquiries (usually dependent upon the number of credit cards you apply for; the less the better) and the types of credit you have, where credit cards have the biggest impact on your credit score. If you pay off debts and continue to pay on time, you can see improvements in your credit rating in a matter of months.
Undeniably, higher credit ratings earn you the lowest interest rates on car loans, home mortgages and credit cards. Furthermore, higher ratings help you tap into the credit cards with the best rewards programs. For example, according to the “Newsweek” article, you can earn up to 5 percent cash back on all grocery and gas expenditures while racking up another 1.5 percent on all other expenses if you know where to look. Even certain insurance agencies will lower your rates based on your credit rating--a high credit rating indicates you are responsible with your fiscal decisions which many agencies generalize to your everyday life.