A credit rating is the metric used in the financial world to assess your credit worthiness. It is based on data collected nationwide from a wide variety of sources covering your entire payment history.

First, let’s begin with definitions.

Your credit rating is an estimate of your ability to fulfill your financial commitments based on your financial history. Banks, credit card companies, phone companies, landlords, public utilities, and even potential employers may check credit ratings as part of any application procedure.

Your credit score is a numeric ranking based on your credit history that indicates your capacity to repay a loan or any other financial obligation. They usually range from a maximum of 800 (an excellent score) to a minimum of 300 (a bad one).

Credit scores are usually created by consumer reporting agencies (also known as credit bureaus), which collect and aggregate consumer payment data collected from banks, merchants, credit card companies, tax authorities, public utilities, internet service providers, phone and cable TV companies, as well as innumerable other similar sources nationwide.

There are three major credit bureaus in the United States: Equifax, Experian and TransUnion. All three will usually have a file on you that lists your entire credit history: What bills you have paid and what bills you have not paid, credit card payments, bankruptcies, alimony payments, federal, state and municipal taxes, even speeding tickets. In addition, there are dozens of other consumer reporting agencies throughout the country that usually specialize in local markets.

All consumer reporting agencies or credit bureaus have been regulated by the federal government under the Fair Credit Reporting Act (FCRA), passed in 1970, which requires them to ensure that the information they gather and supply to banks and other financial institutions for their use is a fair and accurate summary of a consumer's credit history.

Banks and other financial institutions will request your credit score from a consumer reporting agency to use as the basis for determining your credit eligibility. Your credit score is what they refer to, for example, during their underwriting process when assessing a loan application − or in other words, your credit score is the bank’s way to determine whether or not you are reliable enough in their eyes to pay back a loan, be it a short-term loan or a long-term loan.

Another score for evaluating your credit worthiness used, for example, to approve a mortgage, is your FICO score (FICO being an acronym for Fair Isaac Corporation, the company that developed the FICO score formula). Borrowers with a high FICO score tend to be able to obtain lower interest rates on mortgages and other loans than borrowers with a low FICO score. In other words, the more you compromise your credit score the more you will compromise your ability to obtain favorable terms when applying for most forms of credit.

Sometimes, a customer’s credit score is deemed too low to obtain a traditional bank or credit card loan. This usually happens when a customer has a bad credit history because he or she defaulted on payments or has a very thin credit file and lacks a transactional history. An alternative solution for customers with bad credit is a no-credit loan. No-credit loans do not require a credit check.

One example of a no-credit loan is a payday loan. These rarely incorporate a comprehensive credit check, so they allow customers to access funds quickly on demand. Payday loans, however, can soon become unaffordable if handled irresponsibly, since the entire loan amount plus interest is usually due to be paid on your next payday. Another example of a no-credit loan is a car title loan, in which the borrower puts his vehicle up as collateral. Should the loan not be repaid on time, the lender will be able to take possession of the vehicle and then would be entitled to sell it to recoup his money.

As you might conclude from this brief overview, a healthy credit rating is a vital element in your economic wellbeing. A low credit score will be detrimental to your financial wellness. If you are ever in a need of a short-term loan and find that your credit score is insufficient to obtain one from a traditional source, consider applying for one with CreditCube.