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What Is a Credit Rating?

A credit rating is a method of assessing how credit worthy is an individual. The rating is represented by a number that lending institutions use to find out if the individual should be approved if he is applying for credit or a loan. The credit rating of an individual is based on many factors. Some of these factors are controllable by the individual while others are not.

At present, three agencies have become synonymous for credit ratings and have become the resource of lending institutions if they want to get the credit rating of a person. These three companies are TransUnion, Equifax, and Experian. It is not unusual for a lending institution to acquire two or more reports. The reason for this is that the agencies’ reports may have differences. There are various opinions on which agency is the best in giving out credit ratings.

The agencies use a formula in determining the credit rating of a person. This formula, called the FICO, stands for Fair Isaac Credit Organization. The name is actually one of the first credit ratings companies to emerge in the 1950s. In a FICO, the score will range from between 300 and 900. The number is a fair approximation of the individuals level of risk if a lending institution approves his loan. A 300 FICO score means the individual is an extremely high risk while 900 means that the person poses absolutely no risk.

Arriving at the FICO score is based on calculating the person’s a percentage of the total credit being used, how long the lines of open credit has been open, the credit line types he has, the size of the past lines of credit and the number of delinquent payments.

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