Lenders have established a system whereby they can estimate the credit worthiness of customers. Credit worthiness is a measure of how risky it is to lend money to a person, in terms of the person paying back what he owes. Lenders estimate one’s credit worthiness by taking a look at the credit rating.
The credit rating is actually a number that is the result of a thorough check of one’s credit history. Institutions called credit bureaus are the ones responsible for conducting the credit check. They look at all your recorded financial transactions, outstanding debt, payment records, and so on. At the end of the process, you are given a credit rating, which lenders will use to determine whether or not they want to give you a loan.
Many factors are taken into consideration when a credit check is carried out. Some of these factors are within an individual’s control, while others are not. The factors that an individual may do something about include amount of credit used, saving patterns, debt, spending patterns, and payment patterns.
In the United States, there are four credit bureaus. These are Experian, Equifax, TransUnion, and Innovis. These four utilize the Fair Isaac Credit Organization (FICO) formula to come up with the credit rating, known as FICO Score. This score ranges from 300 to 900, wherein the higher the number, the lower the risk for the lender. It then follows that the higher one’s credit rating is, the better the chances are of getting a loan approved.