Credit Rating
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If you have a good credit rating, you have easier access to mortgage and car loans, and other forms of credit. If your rating is poor, companies perceive you as a high risk for defaulting on a loan. As a result, a company may deny you a loan or increase your interest rates to reflect the higher risk.
Basic Types of credit rating
There are different types, they include the following:
- Individual: a rating applied to an individual person
- Corporate: ratings applied to corporate entities
- Sovereign: ratings of a sovereign entity, usually a country
- Short-term: applied to the probability of an individual or group becoming bankrupt and defaulting within a year
- Long-term: the probability of defaulting applied to a longer time frame
Elements in the rating process
In both Canada and the United States, it is the provenance of credit bureaus to determine your rating. These companies establish your exact rating through an analysis of your credit statistics.
Fair Isaac Corporation (FICO) calculates its three-digit credit score, a number typically between 300 and 850, on an analysis of specific data. Three other groups/systems providing credit rating services include NextGen, VantageScore and the CE Score.
The actual information taken into consideration to determine your rating includes data from your financial history and current assets and liabilities.
Your punctuality in making payments and the amount of debt you are currently carrying are also part of the systematic analysis. So, too is the length of your credit history, the type of credit you are using and your recent credit search. All become a percentage of the data analyzed to determine your rating.
Significant factors
One of the single most important factors affecting your rating is whether you pay your bills on time. Your payment history indicates whether you are a good credit risk.
If you pay your bills on time, chances are your rating will reflect this to your benefit. If you do not, the opposite will occur.
Another factor is how you use your credit cards. If you use less than 30% of your credit limits, you increase your chances of obtaining the best possible credit score.
This approach will also prevent you from succumbing to debt. Moreover, do not carry a balance on your credit card. Pay off your bill totally. This will help you increase your rating.
Finally, you do not need to carry a balance on a credit card to have a good credit score. Paying your bill off in full is the best way to keep your finances in shape and build your credit at the same time.
When considering your future, remember, your credit score, along with your credit report can affect your ability to borrow money. Keep your finances under control and you can ensure your credit rating will be able to help you obtain financial loans when you really need them.
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