Whether you know it or not, your credit rating affects your life. Be it a car loan, a mortgage, or a start-up loan for a business, the credit score that lenders pull up when you come in looking for financing tells them whether they should a) give you an easy ride, b) take out the knife and scales to measure off their pound of flesh, or c) tell you to get out. With the advent of automated loan approval, the person dealing with you at a lending institution may have no discretion in helping you get the loan – your credit rating is the single deciding factor. In this article we will look into what makes up a credit rating.
The Anatomy of a Credit Rating
Your credit score is made up of a number of, well, numbers. There is no single formula that all lenders subscribe to, but most will have common elements. All the historical data on your previous loans and credit vehicles – including credit cards – is considered. This information is sieved through several ways.
First, the bank wants to know not only if you have been paying down your debt, but how many loans and credit vehicles you are using. If you have too many active debts or a credit card for every store, it counts against you even if you don’t carry a balance on them. Some banks even check how many times your credit rating has been checked.
Following this, your debt history is set against your demographic data: your income level, assets, dependents, ect. Unlike your debt history, you may have to fill the lender in on your asset situation. Most financial assets will appear in your report, but the physical ones that you own, like a car or a brick of gold, won’t. The final filter is your history with the bank.
All of this data is then churned inside the computer and spits out a number between 300 and 900. This is a troublesome point because FICO and other credit agencies keep different scoring scales, as does each lending institution. FICO, for example, has a stated range of about 300-850, though it’s thought that a score of 850 is non-existent and slipping below 400 is exceptionally rare. The score for the average American on most scales is 650-750.
Armed with this data, the automated loan approval system sets the acceptable terms for any loan issued to you, including the possible interest rate range and payment periods. There is still a human element to getting loans, but the range that they have to work with is getting smaller and smaller as more banks turn to automated approval.