Information about Banknote Grading :

Banknotes are usually graded on a descriptive scale of grades. These grades vary somewhat internationally, and as time goes on more grades have been added. The grades specified by the International Bank Note Society are as follows:
Uncirculated (UNC) - refers to a banknote that is bright and has no handling damage, such as folds or creases, nor any cuts, stains, or rounded corners
About uncirculated (AU) - a banknote that is still bright but has trivial handling damage, i.e a light center fold (not a crease, which is a break of the fibres of the paper), without rounded corners.
Extremely fine (XF or EF) - a banknote with one crease or up to three light folds. Paper still bright and attractive, very slight wear to corners allowed.
Very Fine (VF) - Note still attractive, but possible slight dirt or smudging, may have several horizontal and/or vertical folds. Paper remains relatively crisp. No tears, but slight wear to edges and corners is allowable.
Fine (F) - Paper is now slightly soft, considerable wear due to folds from use in circulation. Minor tears to note, not extending into the design. Clear but not bright in appearance. Staple holes but not holes due to folding.
Very Good (VG) - Much wear. Paper is limp. Tears can extend into the design. Staining possible. Discoloration possible. Hole at center caused by folding allowable. Note still looks presentable.
Good (G) - Very much wear, as VG, but more so. Graffiti on note. Small pieces of the note may be missing
Fair - Larger pieces of note torn off/missing, compared with G. Less of the note intact.
Poor - Severe damage due to wear, staining, missing pieces, graffiti and/or holes. May be taped together, have pieces missing. The worst possible condition.
In addition to these grades, it is common to indicate an in-between grade, such as AU-UNC, which is a note that falls between AU and UNC, e.g., because has barely a noticeable counting fold.
Certain vendors and auctioneers break the UNC grade down further, into three grades.
Gem Uncirculated or Gem Crisp Uncirculated - A perfect note, not just in original condition, but with large equally balanced margins, outstanding colour. Thus such a note is not just as originally printed, but was also printed well in the first place.
Choice Uncirculated/Crisp Choice Uncirculated - Just less than perfect, tiny foxing, faint counting smudges, or slightly off-center margins
Uncirculated/Crisp Uncirculated - Still not folded or creased, but suffering from any of: slight fading, yellowing, foxing, very off-center margins, corner folds only in the blank area (not the design)
Collectors will always prefer an Uncirculated note, and these notes command substantial premiums over lower grades. A note in UNC condition is generally worth up to ten times more in this condition compared with merely VG (Very Good). An UNC note can be worth three times as much as a VF one. For notes seldom found in uncirculated condition, the premium may be even higher. The difference between Gem Uncirculated and Uncirculated can also be substantial. As a result, buyers are at risk of grade inflation, in that a dealer failing to notice a fold in an AU note and passing it off as UNC will undoubtedly feel justified in charging a higher price.
Bank notes below VF are usually considered undesirable in a collection, and are generally purchased where better-quality examples are either unavailable due to their scarcity or simply beyond the collector's budget. Common notes in such poor condition, however, are effectively unsaleable for anything above their face value (assuming they are still legal tender).
Various third party grading company's (TPG) offer the service of authentication, grading and cataloging of common varieties of paper currency. These TPG's typically use a seventy-point grading scale to describe the note. Additional notations may be made for exceptional paper quality or other varieties.
Following examination, TPG companies typically encapsulate the currency in what is commonly referred to as a "slab." Similar to the issues surrounding the transition that occurred within the coin collecting field many years ago, controversy exists about the need or value of TPG notes. Without having the ability to closely examine and feel the note due to it being sealed inside the slab, many collectors are not comfortable accepting the opinion of others as to the grade and may either elect not to purchase the note or to cut it out of the slab for examination. Additionally, many noted mistakes in grading by third party grading services have been discovered. However, for collectors less adept at grading, purchasing a note in a slab can provide some additional comfort for the owner in justifying the purchase and cost. It also serves to help protect the collector against unethical activities designed to increase the worth of the note by pressing out folds, washing, repairing tears, or other alterations typically viewed as unacceptable thereby lowering the value of the item.
The vast majority of bank notes are sold using the Uncirculated-Poor grading system, and are never graded with any third party.