March 19, 2009
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News: How Does the CC Rating System Work?
For those who will need to borrow money, it becomes important to understand how the credit card rating systems work. Fair Isaac Corporation has developed a credit card scoring system called FICO that is used by 90% of the major credit card industry.
This system is not limited to only credit cards, but also by most of the lending industries, as well. The FICO rating measures the credit worthiness of consumers to allow credit card lenders, mortgage lenders and those making auto loans to assign appropriate risk premiums in their credit offers. So, of course, credit applicants with better scores will generally be offered better terms. Like any system so large, it's difficult to be fair to everyone and FICO serves primarily to assist the credit lenders to protect themselves from dangerous risk. As far as the borrowers, they do well to understand how the system works to protect themselves, as well.
Because credit cards have become so prevalent in consumers' lives, there's much more activity in this area and so, there are many more ‘bumps and bruises'. Since the FICO System was largely devised for the lenders, the question is, "is it good or bad for credit card consumers?" The two-fold answer is that it's generally fair but, perhaps more importantly, it has enabled the expansion of available credit by a magnitude. Because, now the lenders have a reliable system to predict risk, they are empowered to prudently extend much more credit to consumers then they could have otherwise.
The system has worked great for a long time now and the credit card industry has flourished. Our nation has enjoyed a fluid consumer market which has allowed making larger purchases to be paid over time then would have been possible using only cash. It's a discipline whereby, consumers are ‘forced to reserve moneys' for expensive things they need (or want).
For some current tips and advice on how to care for your credit card rating, please refer to the companion article series entitled: "Tending to Your FICO Score."