In USA, Experian, Equifax, Transunion are the major credit reporting agencies for individuals, which maintain a record of all credit related transaction. Fair Isaac Corporation has created the FICO score, which is the most widely used credit score model in the USA.
The FICO score for an individual is calculated statistically based on the records with the credit reporting agencies. The score is intended to indicate the probability that an individual will default on a particular type of loan. Since default rates are different for mortgages, car loans and unsecured credit on credit cards, the FICO scores may also differ by as much as 50 points.
While an individual can get 3 copies of the credit report for free in a year for checking accuracy, he or she will have to be pay to find out the FICO score. The FICO score is used by banks in making credit related decisions. The credit rating agencies also have their different formulae for calculating the credit scores of an individual.
A FICO score is between 300 and 850, and most of the population has a credit score between 650 and 799. The average credit score is 678 and the median score is 723.
The credit rating or score of an individual is an indication of the credit worthiness of an individual. The credit rating is used by the lender to assess the risk of lending money to the individual or the business, in case of a small proprietorship firm. Though the credit score may be adversely affected by factors which are not in an individual’s control, they often provide an accurate indication of the financial health of an individual.
A poor credit rating /score indicates that the borrower is more likely to default on loan payments, and interest rates are usually higher for individuals with a low credit score. Often, a person with a low credit score may find it difficult to get a credit card or a loan. In such cases, the person has to request a friend or relative with a better credit score to co-sign for the loan.
Credit ratings/ scores are usually calculated considering the financial history, whether payments have been made on time and also current assets and liabilities. For different types of credit like home loans, car loans, personal loans, credit cards, the credit scores calculated may be different.
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