Updated: Apr 05, 2023

The Value of a Good Credit Report

Almost everyone has to borrow money at one time or another. Whether you are borrowing to finance a business, or to buy a house, car or some other major purchase, good credit worthiness makes a vita...
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Almost everyone has to borrow money at one time or another. Whether you are borrowing to finance a business, or to buy a house, car or some other major purchase, good credit worthiness makes a vital difference as to whether or not the loan is going to be granted and on what terms.

A lender must estimate the level of risk by reviewing your record for handling loans and their repayment obligations and assessing your current financial situation.

Besides individuals seeking loans, being a good credit risk is also highly relevant to corporations and local authorities, and even to nations — just as individuals with a history of loan defaults are going to be considered high-risk borrowers, countries with unstable governments and fragile economies also become classified as bad risks and this makes it difficult for them to borrow on the international markets.

How Your Creditworthiness Is Determined

A key ingredient in creditworthiness calculations are the credit ratings calculated by the three major American credit bureaus: Experian, TransUnion, and Equifax. These bureaus compile reports on individual credit status based on details such as payments history, the range of credit options used, the length credit accounts are active, the amount of activity, and credit debts accumulated.

The report also includes any legal actions, court judgments or tax liens relating to that person’s finances. The credit bureaus collect this data from banks, credit card companies, and finance companies amongst other sources. As long as you have had one credit account open for more than six months and it has been active in the past six months there is going to be enough data to compile a report.

FICO Credit Scores

Individuals receive a three-digit FICO score based on their credit reports and the FICO scores for all these three bureaus are of interest to pit potential lenders. The score can range between 300 for those with the most problematic credit records to 850 for a top credit rating.

Credit Score Ranges and Quality

Credit Score Ranges Credit Quality Effect on Ability to Obtain Loans
300-580 Very Bad Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.
580-669 Bad May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.
670-739 Average/Fair Eligible for many traditional loans, but the interest rates and terms may not be the best.
740-799 Good Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.
800-850 Excellent Qualify easily for most loans and lines of credit with low interest rates and favorable terms.

It is important to point out that in addition to influencing bank lending decisions FICO scores are also checked by insurance companies and they can affect eligibility for certain jobs. The term FICO comes from the name of the company, Fair Isaac, who developed this particular credit rating methodology.

Although FICO scores are widely used in the U.S. to determine creditworthiness, they are far from the sole determinant of whether or not the requested loan is going to be granted. First of all, there are other credit bureaus that devise credit scores based on different methodologies. Furthermore, lenders are certain to investigate aspects of the potential borrower’s financial situation that are not covered in credit reports. In particular, lenders want to know about the borrower’s income and employment history, and each lending institution has their own criterion for determining loan eligibility and the generosity of terms the borrower may be offered.

Benefits Of A Good Credit Rating

Maintaining a good credit rating is important because it can affect many aspects of your life.

Personal credit reports may be reviewed when you apply for a job, try to rent an apartment, lease a car, qualify for a mortgage, and more. With a good credit score, you're more likely to be approved. For loans, you'll increase your chances of getting a lower borrowing rate, which will save you plenty of money in the long run.

And for consumers who chase rewards on their spending, a good credit score will qualify you for some of the best rewards credit cards available. You can put yourself in the best position to earn rewards on spending that you're going to make anyway.

Keeping Track Of Credit Scores

It makes sense to exercise your right to get a free copy of your credit report from the three major credit bureaus each year, and this right is independent of whether or not you have been denied credit. With all the efforts they put into producing accurate reports, due to the amount of data handled the possibilities of confusing people with similar names or social security numbers and a myriad of other variables means there is always the possibility of error.

It pays to check the report carefully to verify that all the details are accurate. If a decision to deny credit is based on your credit report, the lender has to notify you from which bureau they received the report and you have two months to request a free copy.

Although credit history stays on the reports for seven years and in the event of a personal bankruptcy for ten years, the negative impression and score resulting from irresponsible actions and business setbacks can be erased if subsequent actions show responsibility and financial stability.