Credit Rating and You
A credit rating is a report that analyzes your credit history and liabilities to provide an assessment of your creditworthiness. It is used by lenders to estimate the probability and time frame of your ability to pay back a loan. Banks and credit card companies use it to determine the customers potential risk profile, to avoid losing their money. A poor or bad credit rating implies an increased risk of default on payments and a good credit rating means that the customer poses a lower risk of defaulting on payments against the loan. A bad credit rating will have repercussions in the form of a higher interest rate on loans or cash advances, higher insurance premiums, and mandatory deposits for some services, such as utilities.
In the US, there is a credit score, apart from the credit rating report, which is a number generally between 300 and 850, calculated using an undisclosed, complicated formula that quantifies an individual’s risk profile and creditworthiness. This number is used by creditors of all types to evaluate the interest rate and credit limit for which you qualify. A higher score is better, since it implies you will pay off our loan and in a reasonable time frame. A score of 650 is considered fairly acceptable to enable you to receive access to credit at satisfactory terms.
The following steps will ensure that you avoid a low credit rating:
- Make timely payments on bills, premiums and installments
- Request creditors to reduce monthly installments and to erase previous late payment history once you have been paying in time for a while
- Repay all past-due payments as soon as you can
- Reduce your debts by clearing up your high interest debt first
- Keep outstanding balance at a minimum
- Keep your lines of credit open even if they are unused, so that you can maintain a debt-credit ratio of 50 percent or lower
- Use an appropriate combination of credit – loans, credit lines and credit cards. Avoid too many installment loans
- Do not open many new accounts in a short duration since this reflects poorly on your credit management skills
- Do not increase your credit limit beyond your means, keep it at a middle level
- Plan and budget adequately before taking on credit
Finally, keep in mind that regardless of your credit score, it is always possible to obtain credit. Even after bankruptcy, people find a way to slowly and carefully work their credit rating back up and gain a respectable score again. With bad credit ratings, it is possible that you may find that lenders ask for a higher rate of interest, but access to loans is still possible, and with planning and effort, a bad credit score can be improved and better rates can be negotiated. Further, payday advances and subprime loans are available for immediate assistance if you have bad credit.