What is Credit Rating? –Credit Score
Your credit score indicates your ability to pay to potential lenders. The better your score, the more likely you are to receive a loan or credit when you need it most.
It is used by persons and companies who purchase bonds to determine the chances of repayment.
A credit score or credit rating is a three digit number used by lenders that indicates one’s capacity to pay mortgage payments, loan payments, credit card bills, car payments etc.
The number is between 300 and 850. Higher number is an indication for better credit score and less risky for any payment. It is also for allowing more chances for getting a loan. A high credit score above 750 helps to give the best interest rates and more chances of getting a loan. If a person’s score is below 600, it will be difficult to find a lender to give loan. Some lender may give loan on low credit score, but it will on high interest rates.
The credit card rating is made up of five parts which includes–
Payment History means the one’s ability to pay bills in time. One’s payment history is the best indicator of the person’s financial behavior. The things that hurt the credit score are late and missed payments, unpaid taxes, and bankruptcy. New events like bankruptcy affect the score more severe than less severe events.
Amounts Owed also represents a part of the credit rating. It indicates the debt as compared to the credit limits. This is also known as the ‘debt to credit ratio.’ It is to be remembered that the lower the ratio, the better will be the score.
Credit Length represents a small part of the rating. The credit length is based on the assumption that one’s past financial habits will remain same in future.
New Credit represents a very small part of the credit rating. The inquiry taking place on applying for a new credit is added to the credit report, which hurts the score on the whole. New credit will also bring down the credit length.
Credit Types represent a minor part of the credit score. It is better to have different types of credits because it shows the experience of managing credit accounts. Different types of credit will help the score, but will not allow too many loans as it is only a small part of the credit score.
• It is advisable to learn the facts used for credit rating and how it is done
• Credit rating should remain steady and always on the higher side.
• A bad credit rating needs to be improved as soon as possible by some ways and guidance from experts.
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