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Know Your Credit Ranking

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Mortgage and Lending with Multi-Prets MR

Credit rating is the means of assessing the credit worthiness of individuals, companies, states and countries. It indicates the ability of the debtor (individual, company, state or country) to fulfill his financial commitments. Credit rating can refer to personal, corporate or sovereign credit rating. Personal Credit Rating: In the US, creditors use a scale of 0-9 in order to rank a debtor. The numbers can be preceded by the alphabets R or I. I refers to credit that is repaid in installments (like mortgage on a house), while R refers to a system of revolving credit (credit cards), whereby the debtor is only required to make minimum monthly payments.

R1/I1 means that the debtor repays his debt in one month, while R2/I2 means that he repays within 2 months. R7/I7 indicates a situation wherein debts are paid by consolidation. R8/I8 implies that debts are recovered by repossession. R9/I9 is the worst rating and indicates the inability to repay debts.

 

Credit Report and Credit Score: Information about credit inquiries, bankruptcies, liens, judgments or collections is sent to the credit bureaus, which prepare an individual's credit report, and assign credit scores. A person has 3 credit scores assigned to him by the following bureaus: Equifax, Experian and TransUnion. While these scores may differ, the underlying principal is the same.

 

The credit bureaus calculate scores based on the credit scoring system created by Fair Isaac Corporation (FICO) in the year 1958. Credit scores computed by Experian are called 'FICO or FICO II', scores calculated by TransUnion are called 'Empirica', and credit rating computed by Equifax are called 'Beacon'. Fair Isaac Corp. has also developed the next generation FICO scores, which are meant to be user friendly. The FICO advanced risk score is used by Experian, while TransUnion uses Precision, and Equifax uses Pinnacle, to calculate credit scores. Credit bureaus also assigns weightage to the following factors while calculating credit scores: 30% to previous credit performance, 30% to current indebtedness, 15% to the use of time of credit, 15% to the types of credit available, and 5% to new credit.

 

FICO scores are fast gaining popularity over the R/I multiple rating system. Hence, we can discuss the importance of good personal credit rating from the perspective of maintaining good FICO scores. What is a Good Credit Rating for an Individual? Credit ratings for an individual range between R0/I0 and R9/I9. 9 is the worst rating while 0 would mean that a person has no credit history. Credit scores for an individual are generally in the range of 360 and 850. A score below 620 is considered unhealthy. The worst score, of course, is 360 and the best is 850. Higher the credit score, lower the risk of a person defaulting. A poor credit score/credit rating would result in lenders charging a premium for providing loans. If the credit score/credit rating is very poor, lenders may refuse to provide credit. A credit score between 650 and 690 is considered good, while a score above 700 is considered optimal, by the lenders.

Christopher Sprague
Perfect Credentials - San Diego, CA

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Sep 09, 2009 12:11 PM