How Are Consumers Divided in the Debt Industry?

In general, lenders classify consumers as prime (creditworthy) or subprime borrowers. A prime borrower has a good credit history and is afforded lower interest rates on loans. Your financial history is compiled and tabulated by a company called FICO (formerly Fair Isaac Corporation), which has created the widely-used FICO score. The FICO Score range is 300 to 850. The higher your FICO score, the greater your chances of being approved for a loan.

FICO Score

FICO, formerly Fair Isaacs Corporation, was formed in 1956 and created the FICO score, which is considered the industry standard for measuring consumer credit risk. About 90 percent of the largest financial institutions use the FICO score. Your FICO score is a three-digit number that determines your creditworthiness in the eyes of a lender and will affect your ability to borrow money and the interest rate charged to you. FICO scores are broken down in 50-point increments.

Score Evaluation

Given the prevalent usage of FICO's scoring methodology, the term FICO score is used interchangeably to refer to your credit score. However, lenders have the option of using their own credit evaluation methodology. Generally speaking, if you have a credit score above 720, you are considered a prime borrower or more creditworthy than a person with a lower score. You may still get a loan if your score is 650-699 but you may have to pay a higher interest rate. A credit score of 620 or lower is considered subprime.

Credit Approval

Although your credit score plays a significant part in a lender's decision-making process, other factors contribute to whether or not you will be approved for a loan such as your income, employment status and current debt obligations. Lenders develop their own proprietary credit risk metrics based on lending experience. Thus, the definition of a prime borrower can vary from lender to lender. In general, a lender's decision to extend you credit is based upon your payment history, which provides some insight into the likelihood the lender will recoup principal plus interest.

Obtaining A Copy of Your Credit Report

If your loan application was denied, you are entitled to a free copy of your credit report by writing to the credit bureau that was used to obtain your credit report. The three credit bureaus are Equifax, Experian and TransUnion. You can also visit their websites to request a copy of your report.