Personal credit rating

by Karl
Updated: August 6, 2018

You have a personal credit rating which is more important than your credit score

While credit scores are intended provide a quick & simple snapshot of an individual’s current financial condition, a more important assessment of credit worthiness (based on long-term behavior) is the lesser known and somewhat mysterious personal credit rating.

In normal terminology, credit ratings are applicable only to organizations (businesses and governments). They use the letters A-D and are unique to the agency providing them. Credit scores are applicable only to individuals, use numbers and for the most part are calcuated using standard methods.

I had long been under the impression that a credit score was so important that I would not even attempt to apply for new credit unless I had paid off all my cards (planning at least a month in advance) for fear of rejection!

Credit score vs credit rating

In April 2018 I moved some balances to a single credit card which pushed the utilization of this particular card to just over 90%.

As expected, even though my overall utilization remained the same, this reduced my credit score significantly. However, to my surprise, I received a credit alert saying, “Good news. Even though your FICO Score went down your Credit Rating did not so it should not impact your credit worthiness.”

FICO Score went down but Credit Rating did not

So I have a credit Rating and it’s not the same as my credit Score!?

Rationale

A credit score can change dramatically from one month to the next and it makes sense that long-term good financial management should carry more weight than a blip. Equally, it should not be possible to cancel out long-term poor financial management with a quick fix.

Lenders must therefore use more intelligence than a simple number to assess risk.

I’m guessing that the main reason it’s difficult to get any hard facts about the rating is to protect it from manipulation. Another is that the sources may go beyond the credit report and seem intrusive.

Benefits

The key benefit appears to be that a credit rating is more robust than a credit score. Consequently, a high rating will override a temporarily lower score (e.g. caused by high balances) when applying for credit.

I’m not sure, but this does seem to be what has happened to me: On the few occasions I can recall when applying for credit at the same time as having a temporarily lower score, I was told my “score” came back amazingly high.

Strategy

One thing I have done which may be a little different is that from time-to-time I make full use my available credit: I max out a card or two and then pay them off. And when I get favorable balance transfer offers, I usually use them even though I don’t need to.

In the short term, this hurts my credit score. In the long term, this shows I can manage large amounts of debt.

I still wouldn’t actively do this when applying for new credit (old habits die hard) but I do have more confidence that my long-term good practices may count more than I realized.

In summary: Use it. Pay it back. Always be good.

More info

“What’s the difference between a credit rating and a credit score?” at investopedia.com explains the standard definitions.

“Credit rating” at bankrate.com provides a clue that there is more to credit rating than the score alone.

Internal links

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