When you receive products or services and promise to pay at a later date, that’s called Credit. Before banks got involved, this helpful tool was extended by a merchant directly to the customer. If granted to the customer, it was based on how well the merchant knew the customer and the customer’s reputation for paying for any goods or services they’d received in the past. More often than not, a simple hand-shake was all it took to seal the deal. A man’s word was his honor, and that was worth something back then.
Nowadays, you enter into a contract with a bank or financial institution and they give you a credit card with a pre-determined spending limit. You then use this card to pay a merchant for their product or service. The bank pays the merchant and once a month, you get a statement in the mail listing your purchases and making a request for a minimum payment towards your balance. Along with banks assuming the position between you and the merchant, they also require you to pay fees, in the form of interest, based on your outstanding balance. Your interest rate or APR is based on your credit rating at the time you acquired the credit card.
What is a Credit Rating?
According to Experian’s website, your credit rating is “influenced by several factors”. TransUnion’s site refers to the process as a “mathematical formula.” The formula seems to involve six basic criteria, such as: recent credit, available credit, payment history, utilization, balances and depth of credit. Experian also explains that this equation was developed by examining groups of consumers (usually more than 1,000,000 at a time) to identify common variables. Statistical models were then built by selecting the variables which would be most predictive of an applicant’s future behavior and assigning those variables an appropriate weight. For example, your payment history and how often you use your credit accounts for 55% of how your score is determined. Both are strong factors in determining your credit worthiness; ie. whether you will pay your debts in the future. The remaining four criteria account for about 45% of your credit score. While these four do influence your credit rating, their impact isn’t as strong when looking at your ability to pay over time.
What is a Credit Score Range?
In 2006, Experian, Equifax and TransUnion, the three major credit reporting agencies, developed a new and improved way to help consumers understand their credit rating. That new procedure is called VantageScore, and with its implementation, credit scores now range from 501 to 990. The higher the score the lower the risk that consumers won’t repay their debts. A letter grade (A, B, C, D or F) is also given to help you assess how lenders view you and how you compare with other consumers. Each letter grade is scaled with your score. A, of course, represents the best credit score range of 900-990, B is 800-899, C is 700-799, D is 600-699, and F is 501-599.
Which Credit Report is Best?
I’m not sure there’s a solid answer to that question, and I imagine it depends on who you ask. One reason why it’s probably a good idea to get a copy of your credit report from all three major reporting agencies is because creditors may or may not report to all three. This can cause a variance in your overall score. So I think you’d find a great consensus of agreement that the best credit report is a combination of all three reports.
What is Your Credit Score?
To find out what your credit score is, you’ll first need to request a report from each of the credit reporting companies. The Federal Trade Commission website states “Only one website is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com“. Everything you need to know about how to get a legitimately free copy of all three of your credit reports is covered in this article on the FTC website: Your Access to Free Credit Reports
They explain that you can get instant access to your credit reports by making your request online or you can make your request by phone. They also explain what to expect when you put in a request for your annual free credit reports. Once you’ve gained access to your reports, you should then be able to determine your over-all average credit score.
