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.
Today, the average credit rating across America is 720 and if your credit rating is above this you will be considered credit worthy. This results in you having more chance of being given credit or a loan. However, there are many Americans who don’t have such a high credit rating and theirs will drop below 630. This will mean that they may be refused credit or a loan agreement, or they may have to pay far more increased credit terms.
Now lenders often know that things happen in life that can’t be avoided. If your low credit rating is due to excessive medical bills or life-altering events that reflect poorly on your credit report, you may be able to talk with them and provide documentation and still get approved. That’s why it’s important to monitor your credit report and attach notes to explain anything that reflects poorly against you.
You will also need to consider that keeping your credit rating as high as possible should be a goal of yours. You will need to understand that this will include paying your bills when they’re due, not overspending, not having a lot of credit card debt, and not spending like there’s no tomorrow using credit. It is also advisable to check your credit report at least every year to make sure there are no mistakes and that if there are any errors you will be able to correct them to bring your scores down.
You may be one of the individuals who doesn’t like the idea of companies holding financial information on you and your financial history coming down to a three digit number. But, the industry who rule the credit and financial world want information on you so that they can decide if you are worthy of credit. If you are in the position to be looking to take out a mortgage for a home or a loan for a car, then you will need to have a reasonably good credit rating that is at least 675. You will need to consider though that this is a figure to attain to and pass on your way to financial credit rating excellence.
You should consider all of the different steps and precautions you need to take that will help you build up your credit rating to be 750 or more, which you should be looking to achieve over the next year or so, just in case you want to take out credit.