Credit Rating and Credit Score

If you are interested in buying a home or a car -- or if you are just interested in bringing a better sense of order to your financial house -- it is important for you to understand your credit rating and your credit score. This article provides you with a much needed overview of your credit rating or your credit score.

The Definition of Credit Rating and Credit Score

As far as most people are concerned, credit rating and credit score are interchangeable. They are both considered in determining how much credit a borrower deserves. However, you could say there is a shade of difference—a credit rating is the amount of credit (and sometimes tells how high of an interest rate) a person should have based on her score. Your credit rating changes as your score changes because you become either more or less creditworthy.

How the Credit Rating or Credit Score Really Works

Whether you are looking at buying a new house, a car, or would like a credit card for various reasons, the one factor that will determine whether you get what you think you need is the credit score. This three-digit number between 300 and 850 will tell a lender or creditor how much of a risk you are. The higher your number the less risk.

Understanding Your Credit History

This number is based on your past. Your credit history is first accessed and reviewed, then assigned that all-important number. This scoring system was invented by Fair Issac and Company at the behest of the three major credit bureaus; Equifax, TransUnion, and Experian. The final score is based on how long you have had credit as well as what types of credit, your payment history and if you have had any late payments, and existing loans or credit and the status of those accounts. Although employment and wages play a big role in extending credit, these items—plus a few others—determine your credit score.

From your history, your credit score will be assigned. Potential creditors will use the report and score, wages, job history, and other financial issues to determine your credit rating and whether you can handle more credit or loans. If they determine that you can, your credit score is often used to determine your interest rate and type of credit you will get.

Interest Rates and Your Credit Rating of Credit Score

For instance, you may be able to get a loan with less-than-stellar credit, but your interest rate will be higher. This means that over the life of the loan, you could pay thousands and thousands of dollars that you wouldn’t have if you’d had better credit. It also means that you may be subjected to more predatory lenders who look for people with bad credit (or low incomes) to charge them huge amounts on loans.

Keep Your Credit Rating or Credit Score in Good Shape

It’s important that you keep your credit score and rating in good condition. But be careful of the scams that promise you a fast cleanup on your credit—cleaning up your credit rating and credit score takes time and effort.