Credit Ratings: The Basics

MAR 17, 2015

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There’s a lot of talk about credit ratings when dealing with personal finance, and while it’s a very important subject, there is also a lot of confusion surrounding the idea of the credit rating. Here are some facts about credit ratings that everybody should understand.

A credit rating is a guideline for potential lenders about how good a credit risk a particular person is. Since past performance is the best predictor of future performance, this rating is based on the borrower’s history of borrowing and repaying, in addition to the likeliness that the person will repay as a function of his or her financial ability to repay.

When someone talks about credit ratings, what they are usually referring to is a credit score. Your credit rating and your credit rating report are generated by one of three credit rating agencies: Experian, Equifax or TransUnion. Since each credit rating agency may have slightly different information and ways of calculating credit ratings, provides services enabling you to get all three reports and scores from each agency.

More Information

There are a few additional things you need to know about credit ratings. First – a credit report does not automatically come with a credit score. In fact, you are entitled to one credit report per year from each credit reporting agency, but to get your score you will have to pay for it separately. Second – each agency has its own scores that it has developed. Check your credit score, so you can see yourself as lenders do, and work to get the best possible terms on your account. Try to understand what your score means to lenders and how you can improve it.

Obtaining Credit Ratings can provide you with a 1 or 3 bureau credit report. This will enable you to get a clear picture of your credit rating. It’s important because when you know where you stand with respect to your credit, you will then be able to determine the steps you need to take to fix it. Your best approach if you are trying to repair your credit rating is to assess your score and report, use tools to figure out what steps you need to take to improve your score, and then check your credit rating from month-to-month to make sure that you are seeing steady gains. When your credit score has risen to a healthy number, ideally something in the 700s, you’ll be ready to look for a loan for that big purchase, such as for a car or home.