Advantages & Disadvantages of Credit Rating

Definition of Credit Rating

In the most basic terms, your credit rating is a three-digit number that signifies your relationship with credit. Created by ratings agency Fair Isaacs, the composition of the score depends on information from your past credit transactions, legal judgments and other regular payments like rent or utilities. Each account, from a loan to a car payment, counts towards this FICO score. Liens and legal settlements also show up on the credit report and knock points from your score.

Advantages of Credit Rating

The major advantage a good credit rating is that it eases financial transactions and keeps low-cost credit available. Some also claim that a high credit rating signals that a person is trustworthy and possesses good character. This is also a big help when searching for a job or obtaining security clearances for well-paying, high status work. With a sound credit background, you're also more likely to get loans and insurance at preferred rates with faster approval. A qualified consumer can also take advantage of the latest credit card offers that carry a low APR, discounts, gift certificates, airline miles and other rewards.

Disadvantages of Credit Rating

Like the common adage that the rich grow richer as the poor grow poorer, such is the case with FICO scores. Just when you've lost employment and fallen behind with bills, or have a medical emergency, the FICO score drops and you face a hard time paying for things in times of need. A low score also creates difficulties getting a loan at a reasonable interest rate. To make things more difficult, credit rating are now used to weed out job candidates, leaving those who need employment the most with fewer quality-paying options than others. Credit ratings can also create a false picture of a consumer's personality, painting a more rosy picture on paper than their true character.

Creating a Good Rating

The factors that create a credit rating stay on record for seven to 10 years. If you've maintained a high credit rating, it means you're financially responsible and can cope with long-term obligations. However, any issues will show up as a mark on your credit history and lead to a lower credit rating. To get the best out of your FICO, it pays to be consistent with regular, timely bill payments and have a few open, on-time accounts to show reliability. Remember, a credit rating is only as advantageous or crippling as the data it contains.