Rating somebody’s ability to repay borrowing is not an exact science. Every consumer is different and outgoings, income and past financial history make each borrower unique.
While banks and other financial organisations use a range of criteria to judge their existing customers, when it comes to an application from a potential new customer, financial institutions rely on data supplied to them by the three main credit reference agencies:
Experian, Equifax and CallCredit.
But while the information held by the three agencies is relatively easy to understand because it documents actual financial events (amounts borrowed, missed payments, dates of settlement, defaults etc.), the actual credit rating for an individual consumer can appear to be a subjective figure.
In simple terms, every borrower is given a figure – or rating – indicating their credit worthiness. The figure represents the level of risk that the agencies believe an individual might represent to a new lender. While the scores are available, deciding what represents a good, moderate or poor credit score is more difficult.
Credit scores range 300 and 850 with the higher the score, the lower the risk the borrower represents and vice versa. While different agencies apply different criteria, this is a basic guide to credit scores and what they might mean for the people falling into each category:
Between 300 and 550.
This is deemed to be a person with poor or bad credit. While scoring between agencies differs, it is believed that anybody with a credit score of 550 or less is likely to be rejected every time that they apply for a loan, credit card or other financial product that requires a credit search.
A score this low usually means that the subject has had a major financial event in their life including bankruptcy which has effectively locked them out of the financial markets for a period of time. Statistics produced by the credit reference agencies in the United States suggest that people with a score of below 550 are, on average, behind on loan, mortgage or credit card repayments at least 75% of the time.
Between 550 and 620
This is the area known as the sub-prime market. People who fall into this category will find it difficult to get credit – particularly from mainstream lenders like the high street banks. Even though a relatively young part of the financial market has grown up to serve this sector, people in the sub-prime category will have to pay higher interest rates and fees when taking out loans than those with better credit records. They may also find that they are not able to borrow as much as or be given lower credit limits than those with good or excellent credit records.
While falling into this category can impair your ability to get credit, it is worth the time addressing the issues which caused the problems in the first place as it is possible to boost a score to above 620 relatively easily.
Figures from the US suggest that people in the sub-prime category are behind on loan repayments 50% of the time.
Between 620 and 680
People with scores in this category are deemed to have reasonable credit records. But that doesn’t mean that getting access to new lines of credit will always go swimmingly: while you are likely to be approved by most lenders in this category, you are also likely to face higher interest rates and lower credit limits than borrowers with scores of about 680. That said, many lenders will be prepared to offer borrowers in this area the best rates and they will have access to higher credit limits.
The rates of delinquency – those behind on repayments – are said to be between 15 and 30% in this category.
Between 680 and 740
If you are in this category, then pat yourself on the back. Scores of around 700 are thought to be classed as ‘good’ by the major lenders and those who fall into this area are likely to be approved for loans and other forms of borrowing every time. They will also be able to access significantly lower interest rates and higher credit limits.
If you have a rating between 680 and 740, then any request for an increase in your credit limit on an existing credit card is likely to be approved. People in this credit score category are only likely to be behind on repayments 5% of the time.
Between 740 and 850
We are now into ‘excellent’ territory with most financial experts considering anybody with a score from the mid 700s upwards to be the most attractive class of borrower to banks and other credit organisations. If you fall into this category, then you are likely to be approved for new credit applications virtually every time and will have access to the very lowest interest rates and highest credit limits.
While having a score of over 800 might sound important, it is thought that most lenders are happy to take anybody over 740 and don’t make much of a distinction between somebody, say, on 770 and somebody with a score of 830. But while it might not make much of a difference on the way up, the higher the score, the better your prospects should you face unexpected financial difficulties in the future. If you are late with a repayment on a loan or credit card, you are less likely to fall out of the top category if you had close to the highest score in the first place.
People in the highest category are, on average, behind on repayments only 2% of the time.
Article provided by Solution Loans, a technology-focused finance broker with a wide range of products and many years experience in advising clients of the most suitable type of credit.