A good credit rating means easier access to finance, so it’s very important that you maintain the best rating possible. Although credit ratings are based on complicated calculations, and vary depending on which company does the calculation, there are some constants. Here are four important factors that affect your rating, no matter who calculates it:
Payment history
Your payment history consists of the number of bills you have paid, on time or not, and the amount of time taken to clear late payments. Generally speaking, it is best to pay your bills in full, and on time. One notable exception to this is credit card payments, where paying the minimum each month can actually improve your rating. There’s more about this later.
The biggest negatives in this section are bankruptcies and foreclosures. Both of these represent major events, so they are serious black marks. Despite what many debt companies advertise, declaring bankruptcy does not give you a clean slate, and can have some nasty long-term effects.
Current credit
The amount of money you owe at the moment, and your credit balance, will also impact your credit rating. Whether it is auto loans, housing loans, or credit card debts, they all count. This does not mean that you should have zero credit to get a positive rating. Lenders want to see that you are financially competent, stable, and able to repay all your existing loans on time. This is a sign that you can be trusted with further credit, as long as it is within your budget.
A great example of this is credit cards. As mentioned earlier, paying less than the full amount every month can actually improve your rating, because the card company sees you managing your money (and likes the fact that you pay them interest). Provided the balance does not get out of hand, and that you pay it all off eventually, spending a little money in card interest can improve your credit rating.
Credit history
Your credit history also helps determine your credit rating, in a similar way to your current credit and payment history. Basically, the longer your positive credit history is, the better your credit rating will be. Lending risk assessment is always based on measuring how likely a borrower is to repay the money, without hassle. Consequently, lenders want to see how much credit you have taken in the past, and how you managed to repay it. A long list of borrowed money, along with an equally long list of repayments, will ensure a high rating.
New accounts and checks
Opening a lot of new credit accounts can negatively impact your credit rating, for two reasons. First, lenders will assume that the fact you have more credit will result in you making more credit purchases. This may impact your ability to honor repayments. Second, opening too many accounts can be considered as a sign that you have cash flow problems, which implies financial incompetence.
It is also important to note that credit checks can affect your rating as well. Lenders are allowed to perform “hard” and “soft” verifications of your credit rating; most do the “hard” version, which is marked on your history and counts as a negative. If you have any influence or control over your credit checking, get your potential lenders to do “soft” checks: the results are similar, but the check is not noted on your record and does not affect your rating.
A good credit score is essential for all of life’s big purchases – a mortgage, a business loan, or any other substantial sum of money. That’s why it’s important to manage your finances properly and pay your bills on time. The healthier your credit rating, the easier it is to access finance when you need it!
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