So what is a credit rating? Put quite simply it is where a reputable credit agency assesses the credit worthiness of someone applying for credit, a specific type of debt or a loan. Contrary to popular belief universal credit ratings simply don’t exist, neither do so called ‘blacklists’. All lenders determine credit scores based on profitability. In a nutshell it is an evaluation made by a credit rating agencies employed by the credit issuers on the possibility of future default by the borrower.

Anyone who is prepared to pay for the information can check out whether you are credit worthy and if so by how much; this is where your credit score can come into play. This said it is imperative to realise that your credit ratings will not be based on a whole stream of mathematical formulas.

Rather the credit rating agencies employed will use their long-standing experience and, even more important, their judgement in deciding what bits of public and private data should be weighed up when issuing a rating for a particular person or company.

Basing it on the analysis of a person’s financial history and an analysis of their long term economic prospects, poor or bad credit rating shows that in the agency’s opinion that the individual or company is a high risk borrower as they are much more likely to default.

Of course there is nothing to say that lender’s are obliged to hand out credit; as far as they are concerned it’s more about profit than risk.  Decisions often revolve around how much money you’re likely to make them. Risk however does play a major part, since those individuals or companies who are less likely to repay a loan are going to be a distinct threat to future profits.

Do remember also that banks exist to make money; understand that principle and you can begin to play the system if you learn to be savvy. Strange at it may seem sensible people who always repay their loans as soon as possible or move their debts to 0% cards to avoid paying high interest may well get rejected. Why? Answer – because the creditors don’t expect to make much money out of these careful folk!

How then is a credit score different from a rating and why is it important? Credit scoring is quite simply a numerical conclusion based on the close analysis of an individual’s credit files, and it is meant to represent the risk to lenders, or creditworthiness, of that particular person.
A credit score is mainly composed from credit report information usually obtained from recognised credit bureaus. All official lenders, which includes banks and credit card companies use credit scores.

Be aware that credit scoring is not just  limited to banks many other organisations, employ the same method for checking out a person’s finances; these might include insurance companies, private  landlords, mobile phone companies and even government departments.

Also credit scoring doesn’t just influence what products are available to you, but also how worthwhile the ones you actually get are. Most loan rates are therefore going to be representative of your personal circumstances.

Which means that the APR depends almost entirely on your credit score; this said though at the end of the day credit scoring is all about profit with less emphasis on risk. Even good risks can be turned down simply because they won’t make the bank any real money. All lenders choose their customers for their own benefit, not the borrower’s. Of course, risk is always going to play a part, since those who can’t repay are a serious threat to profits.

However, unfair as it seems, even the most respectable and solvent people can be turned down if they’re unlikely to generate future profit. The current financial crisis has come about because lenders only had their eye on the profit not necessarily the risks and banks haven’t really changed that much; they prefer to ‘cherry pick’ customers who will keep paying.

They are there to make money, not help us, after all the most profitable credit card customers are those perpetually in debt, but never defaulting and just about meeting the minimum repayment and banks score you based on products they’d like to sell you in future.

Scoring systems are never published and they can differ wildly from lender-to-lender and indeed product-to-product and while one may company reject you, it doesn’t follow that another will. Of course some bad risk borrowers are unattractive to almost all lenders and will mostly get turned down, expect by bad credit loan companies who are mostly sharks.

In the end credit scoring comes down to lenders picking their ideal customers, and while their reasons for rejection can seem strange or even unfair these reasons make perfect business sense to them. So to succeed you need to understand the system and rather than be told “Your credit score wasn’t high enough”.