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Do you know what is credit rating? Furthermore, do you know what your own personal credit score is? Most people don’t think they need to worry about it. they do. Even if you never borrow money you still need to be concerned. Let’s say you need to buy a new car, and like most of us, can’t afford to pay cash for it. You will need a car loan. At some point in your life, you’ll probably want to buy a home. You’ll probably need a mortgage! The most important factor that the lender considers is your credit history and credit score. This will factor into the interest rate offered to you. You need to understand this important part of your financial life in order to manage it to work in your favor. If you ignore it, it will probably work against you.
Credit rating is issued by an agency. The rating is a measure of how you’ve handled your finances. A credit report contains information about where you live, how you pay your bills, and whether you’ve been prosecuted, arrested or filed for bankruptcy. Nationwide consumer reporting agencies sell the information in your reports to creditors, insurers, employers and other businesses who use it to evaluate your applications for credit, insurance, employment or renting a home.
There are three main bureaus. Each company determines your individual score based on a formula developed by the Fair Isaac Corporation. Each agency uses slightly different wording for its score. Equifax calls his score a “beacon;” The experiment labeled their scores as “FICO;” And Trans Union calls its score “Empirica”. Since lenders typically don’t report account activity to all bureaus, your credit score may vary.
The rating takes into account activity relating to revolving and installment based credit not secured by hard assets. This includes your credit cards, term loans, trade accounts, public utilities, lines of credit, etc. Agencies may not use the same scoring system, so even if all the information is exactly the same, scores may differ. The rating system assigns you a credit score between 300 and 900 and a higher score indicates a lower credit risk. A score of 650 or higher is generally considered good credit by most lenders.
Which factors matter?
Payment History – Were payments made on time? – 35%
Balance – Is the balance close to the limit? – 30%
Length of Credit History – How long have your accounts been open? -15%
Borrowing more – How many new accounts were opened? – 10%
Types of Credit in Use – Mortgage, Auto, Consumer Finance Accounts, Revolving and Installment Loans -10%
What doesn’t count?
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your race, color, national origin, gender, age, marital status
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Your salary, occupation, job title, employment information or home address
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Interest rate on your fee accounts
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Anything like child support, rental agreements, credit counseling partnerships
Is Your Credit Score Always Accurate? No. It is estimated that about 80% of credit reports contain errors. So if you want to rectify these errors then you must get a copy of your report. Fortunately, the Fair Credit Reporting Act requires the nationwide consumer reporting agencies (mentioned above) to provide you with a free copy of your credit report upon your request once every 12 months.
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