The Importance of Your Credit Rating

People have become increasingly reliant on credit. As a result, it's crucial that you understand personal credit reports and your credit rating. Here we'll discover what a credit score is, how it is determined, why it is essential and, finally, some tips to attain and maintain good credit.

What is a Credit Rating?

When you use credit, you are borrowing money that you swear to pay back within a specified period of time. A credit score is a statistical method to verify the likelihood of an individual paying back the money he or she has borrowed. The credit bureaus that issue these scores have dissimilar evaluation systems, each based on different factors. Some may take into consideration only the information contained in your credit report, which we look at below.

The primary factors used to calculate an individual's credit score are his or her credit payment history, current debts, time length of credit history, credit type mix and frequency of applications for new credit. Because the scoring systems are based on different criteria which are weighted differently, the three major credit bureaus Equifax, TransUnion, and Experian which may issue differing scores for an individual, even though the scores are based on the same credit report information. Scores range between 350 is extremely high risk and 850 is extremely low risk.

What Makes up Your Credit Score?

When you borrow money, your lender sends information to a credit bureau which details, in the form of a credit report, how well you handled your debt. From the information in the credit report, the bureau determines a credit score based on five major factors. Previous credit performance will be checked. Current level of indebtedness can somehow influence your rating. Time credit has been in use as well as the types of credit available. Lastly, your pursuit for a new credit is studied.

Your credit rating will most affected by your historical propensity for paying off your debt. The factor that can boost your credit rating the most is having a past that shows you pay off your debts fairly quickly. Additionally, maintaining low levels of indebtedness or not keeping huge balances on your credit cards or other lines of credit, having a long credit history, and refraining from constantly applying for additional credit will all help your credit score.

Why Your Credit Rating is Important?

When you apply for a credit card, mortgage or even a phone hookup, your credit rating is checked. Credit reporting makes it possible for stores to accept checks, for banks to issue credit or debit cards and for corporations to manage their operations. Depending on your credit score, lenders will determine what risk you pose to them.

According to financial theory, increased credit risk means that a risk premium must be added to the price at which money is borrowed. Basically, if you have a poor credit score, lenders will not shun you unless it is utterly awful. Instead, they’ll lend you money at a higher rate than the one paid by someone with a better credit score. The table below shows how individuals with varying credit scores will pay dramatically different interest rates on similar mortgage amounts - the difference in interest, in turn, has a large impact on the monthly payments.

Tips to Improve or Maintain a High Credit Score

Make loan payments on time and for the correct amount. Avoid overextending your credit. Unsolicited credit cards that arrive by mail may be tempting to use, but they won't help your credit score. Never ignore overdue bills. If you encounter any problems repaying your debt, call your creditor to make repayment arrangements. If you tell them you are having difficulty, they may be flexible. Be aware of what type of credit you have. Credit from financing companies can negatively affect your score.

Keep your outstanding debt as low as you can. Continually extending your credit close to your limit is viewed poorly. Limit your number of credit applications. When your credit report is looked at, it is viewed as a bad thing. Not all hits are viewed negatively such as those for monitoring of accounts, or prescreens, but most are. Credit is not built overnight. It's better to provide creditors with a longer historical time frame to review: a longer history of good credit is favored over a shorter period of good history.

See Also

Best Credit Cards Canada

Best Balance Transfer Credit Cards Canada

Best Cash Back Credit Cards Canada

Best Capital One Credit Cards Canada

Best MasterCard Credit Cards Canada

Best MBNA Credit Cards Canada

Best Visa Credit Cards Canada

Best Secured Credit Cards Canada

Travel Credit Cards Canada

THE IMPORTANCE OF YOUR CREDIT RATING

Article Created: 2010-09-21
Article Updated: Not yet updated.