Within a credit score, an additional letter grade is often assigned to further identify a customer's trustworthiness when it comes to credit. These ratings resemble letter grades received in school (A, B, C and D) with "A" being the highest grade and "D" being the lowest.
Significance
Credit ratings are based on a customer's credit score to further categorize credit valuation. The most widely accepted credit rating model is FICO (Fair Isaac Corp.) which calculates a credit score number from 300 to 850 to an individual's history.
Function
Credit ratings (A, B, C, D) give a quick letter grade to an individual's credit history. This allows financial institutions to determine how likely an individual will pay money back if given a loan, as well as employers to verify how responsible their employees are.
Letter Grade Breakdowns
FICO designates letter grades to credit score numbers in the following way: "A" rating is 720+ (excellent), "B" rating is 650+ (good), "C" rating is 575+ (average), and below 575 is a "D" rating (poor). Different lenders may vary from these standard four credit ratings (i.e., A+, C-).
Consequences
Credit ratings which a financial lender deems to be "low" (this definition varies from lender to lender) can affect an individual's ability to get a mortgage, a loan for a car or other large purchase, a low interest rate on credit cards, insurance rates and, in some cases, employment and housing.
Calculation of Credit Rating
The exact calculation for how a credit rating is determined is not disclosed by the institutions that create them (i.e., FICO). However, the following factors have been identified as playing key roles in the calculation: past payment history, debt owed, length of credit history, any newly obtained credit and types of credit used.
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