Credit Scale

The credit rating scale used today in the United States is different than the system used twenty years ago. Twenty years ago the content of one’s credit determined whether or not a loan was issued to a potential borrower. Although the content is as important, numbers help to gauge creditworthiness at a glance. The days of studying six page credit reports to determine loan approval are gone.

The credit report is still divided into three major sections. The first section lists entries of public record. This includes judgments, collections and bankruptcies. Bankruptcies remain part of the credit report for ten years and judgments remain for seven years. Collections become judgments if the credit goes to court to get a court order to allow collection of the debt. Student loans cannot be filed under bankruptcy protection if state funded. These debts affect the credit scale score like an IRS debt.

The second section of the credit report lists debts by creditor, date of activity, amount and status. Understanding how this information affects your credit will help you keep your score high. Having a few credit cards close to the maximum limit has a greater adverse affect than having a larger number of credit cards that use only 40% to 50% of the credit limit. Closing credit card accounts as opposed to lowering the minimum payment also has a negative affect. Another surprising fact is that it is easier to get a car loan than it is to obtain a credit card with a score between 500-600 on the credit scale.

The last section of the credit report lists inquiries by potential creditors. It is a good idea to be mindful of the number of applications made in a 14-day period, for this adversely affects the credit score. Too many inquires within this time period lowers the credit scale number. There are some exceptions to this rule. Background checks and job inquiries are not counted adversely.

The credit scale is used by potential employers as well. It gives them an idea of how an applicant manages their finances, which in turn may affect job performance. The credit score scale, or FICO score as it is commonly known, may fluctuate between 400-850. The lower the number, the less likelihood of receiving a loan.

When applying for a home loan, the debt to income ratio is calculated in addition to factoring in the FICO score. In this case the number on the credit scale does not give the full financial picture of the applicant. The credit score may have been affected by a medical crisis or other circumstances that require further investigation.

Several other countries use their own versions of the credit rating scale to determine loan approval or rejection. Canada’s system is closest to the United States. They even use the same agencies. The only difference is that Canadians can request more than one free annual copy. Americans can do the same if the requester can prove they were recently denied credit.

It is a good practice to request an annual credit report. Even if you don’t expect there to be any negative information on your report, there could be. Often times people who share common names, junior and senior distinctions and victims of identity theft are not aware of discrepancies until they go to apply for a loan or have their credit history requested for another reason. The three credit reporring agencies are Equifax, Transunion, and Experian. Transunion and Experian carry the same information.

Although a credit report can be requested online, it is sometimes best to order by mail. Disputes are better handled by mail as opposed to online explanations. If a FICO score is below 500 on the credit scale, it is considered a poor score and warrants improvement. There are several ways to improve this score. Consistency is the best way. You must be sure to pay at least the minimum payment amount on time every month.

Implementing the credit scale has made it easier for those wanting a glimpse of an applicant’s ability to repay a loan. It is up to the consumer, however, to maintain the details of his or her credit standing. The objective is to have a number on the credit scale that prompts an immediate favorable response without requiring further investigation. This objective is important because the use of the credit report scale determines whether or not resources can be obtained to fulfill our goals, wants and needs.