One of the most misunderstood aspects of personal credit is credit rating. Credit rating is often mistaken for credit score. Let's make sense of these ratings...
What are credit ratings?
To be short - they are not credit scores!
To be simple - they are grade letters on a scale from A to D and everything in-between, like A+, B- ...
To be precise - Credit Rating (in general): a grade that is calculated based on credit score, past performance in paying debt, current financial standing, and actual loan parameters.
Your credit rating is derived from your credit report, which is a profile of your borrowing, charging, and repayment activities. National and local consumer reporting agencies, also called credit bureaus get data from banks, finance companies, merchants, and credit card providers to assemble a computerized credit snapshot. A good rating helps you accomplish financial goals; a poor rating limits your financial opportunities.
It is important to understand that credit represents a loan, not a gift. It has to be repaid, often with interest, and the longer you take to repay a credit expenditure, the more expensive it will be.
How credit rating is used by lenders
To minimize its risk lender uses credit rating to establish credit-worthiness - predicting future credit performance - an evaluation of your ability to pay back a loan.
How does this rating affect you?
People with strong credit ratings tend to qualify for lower-cost loans, while people with weaker ratings might have to pay a higher interest rate. If your credit rating below A or A- you have to go to sub prime lender often called B/C lenders. Bad credit rating can even affect your employment.
Credit rating Score
That's a tricky part... Every bank or lender uses its own scale to define your rating. In general, it comes down to several ratings such as 'A', 'B', 'C', 'D'. But what makes you qualify for one of this ratings could be different. Your credit worthiness or risk profile is a main factor here.
To assess your risk profile while assigning a credit rating, banks consider "little things", for instance, when you apply for a mortgage, bank looks very closely at the combination of how much money you put for down payment and what percentage of you gross income goes to cover all the expenses (known as Debt to Income ratio).
Here is an example: your credit score is very good, let say 710 and you put 10% down for a house purchase but you will spend more than 50% to pay all bills including new mortgage, existing car payment, credit cards, student loans, etc. That qualifies you for A- rating.
The other guy's credit is only 685 and he puts 10% as well but his expenses are well under 45%. He will get a coveted A rating.
Another huge 'little" factor in determining credit rating is late payments. Banks have a scale that is pretty persistent in the lending industry. It shows, how many times you were late and for how many days - 30, 60 and 90. How a given bank assigns an exact credit rating letter is impossible to know but you better believe it, the impact of being late is very heavy. The best thing, needless to say, is not to have any late payments.
Can you repair your credit rating?
Since the rating is assigned by a lender then it is lender you have to prove to that you're risk worthy. Despite that you can't see it, you can improve your credit rating. Find details about it on how to repair your credit rating page.
