One of the prime determining factors, when it comes to deciding the fate of your loan application, is your current credit score rating. To be able to increase your chances of landing up with a good line of credit, what you need is a good credit score. Ergo, it is essential that you know how credit scores are calculated and how an excellent credit score can open the doors of credit offering financial institutions for you.
About Credit Scores
When you approach a bank for a loan, to finance your business or personal purchases, your current financial status, as well as your past credit usage record comes under the scanner. What a bank or any other financial institution needs to determine is your repaying ability. To make it easier for financial institutions to determine an individual's creditworthiness, the concept of a credit score was introduced.
A credit score is a three digit number ranging from 300 to 850, which is calculated based on the credit reports of every US citizen. So according to this system, the highest credit score possible is 850, obviously the lowest being 300. The FICO credit score, based on the Fair Isaac algorithm is used in USA, by every financial institution. Let us see what are the factors that are taken into consideration, when calculating the FICO credit score, which will be followed by an analysis of the credit score scale.
How are They Calculated?
There are several factors that need to be taken into consideration to get a clear idea of the creditworthiness and repaying ability of an individual. The Fair Isaac algorithm takes many factors into consideration when calculating the credit score, and makes it easy for a financial institution to make a decision about a loan application from a particular individual. These factors include past repayment history, accumulated outstanding debt, new credit lines opened in the recent past, and the types of credit used.
Based on all these factors, the Fair Isaac algorithm is used by credit bureaus to determine the credit score of an individual. Credit card payments, loan installment payments, and credit usage history, have a huge impact on the credit score of anyone.
Ratings Chart
The credit scores explained here would be incomplete without understanding what is actually considered to be a bad, good or excellent credit score. Based on your credit usage history, your credit score could be anywhere between 300 and 850. The credit score scale chart presented below, will give you an idea about how favorably your credit score will be perceived by banks and financial institutions, when you apply for a loan.
| Credit Score | Description |
| 730 - 850 | Excellent |
| 700 - 729 | Great |
| 670 - 699 | Good |
| 585 - 669 | Average |
| 300 - 584 | Bad |
As you can see, any score above 730 is an excellent credit score, which will provide you with easy access to credit lines, from any financial institution. A score between 700 and 729 will also make it fairly easy for you to get a loan. If you are anywhere in the 300 to 584 territory, you have a bad credit score, which will make it tough for you to get a loan. You can expect the bank to demand greater collateral and high interest rates, if you have a bad or average credit score.
Check out your current credit score from any of the credit bureaus and refer to the credit score rating scale to know what are your chances of being offered credit lines, by financial institutions. You need to understand that it's all a cycle and your current credit score links your past financial karma, with your future chances of credit availability. The more wisely you use your available credit lines, the better is your credit score and better are your chances of getting loans in the future!
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