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Credit Rating System

Fair Isaac Corporation (FICO) is a credit rating or score established by three agencies: Experian, Equifax, and TransAmerican. The scores can range from 320 to 850 and, in order to secure a loan, an individual's score as determined by the three credit report agencies, can make all the difference in obtaining such a loan. The score also determines what type of interest rate will be applied to any loans.

Loan Examples using FICO Scores

Here are examples, along with FICO scores, interest rates, and monthly payments. These estimates will be based on the highest and lowest FICO score for each loan type in one state.

Car Loan: $17,000 Low End FICO Score
FICO Score: 720-850 500-589
Interest Rate: 6% 15.755%
Monthly Payment: $517.00 $596.00

15 Year Home Equity Loan: $50,000
FICO Score: 740-850 620-639
Interest Rate: 7.963% 12.221%
Monthly Payment: $477.00 $607.00

30 Year Fixed Mortgage: $300,000
FICO Score: 760-850 500-579
Interest Rate: 5.676% 10.473%
Monthly Payment: $1,737 $2,738

As you can see, there is a significant difference between the high end and low end scores especially when it relates to the 30-year fixed mortgage.

What Factors Does the Credit System Take Into Account?

The factors that are used to determine the credit rating of an individual include: income; the number of credit cards and/or loans; paying bills on time; minimum monthly payments only; and any defaults or judgments listed.

What Bad Credit Can Mean To You

The problem with having a bad credit rating is that it will be difficult to impossible to obtain a loan or credit card from a bank or other lending institution. Moreover, your existing credit cards may see an increase in interest rates and/or the companies may reduce your credit limit. To improve your credit standing, you can apply for a payday loan and pay it back within a short period of time. This action will improve your credit rating.

In fact, when an individual files for bankruptcy, the first recommendation offered is to begin to establish good credit. This can be achieved by applying for a debit card from a credit card company (after a year and a good re-payment track record, you may be eligible to apply for a credit card) or applying for a payday loan.

What Are the Main Reasons for Bad Credit

1) Making too many loans with insufficient income
2) Applying for a credit card and being rejected
3) Late payments and bounced checks
4) Use of collection agency by the lender.

How To Improve Your Credit Score?

The best way to improve your credit score is to pay off the debts and loans as quickly as possible. This can be done by paying more than the minimum monthly payment on credit card balances, ensuring you have enough money in your checking account to cover bills, avoid applying for additional credit cards, and do not opt for debt consolidation by using one credit card to pay off another.

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