Understanding Credit

understanding credit

Before the system of credit rating came into existence, lenders did not risk giving money to anyone and everyone, as they couldn’t predict who was creditworthy and who would default on a loan. Even the smallest default, would stop then from giving credit. But all this has changed now. People with not a very good credit track record have access to credit, thanks to standardisation of credit scores. Lenders can now predict credit behaviour with the help of statistical models and credit score. This helps companies to offer different risk levels. Thus individuals who are termed as high-risk borrowers or have low credit scores are not denied credit, but are given credit at higher interest rates.

Lenders criteria for credit

Each lender has some guidelines and rules for granting credit. Credit score is not the only factor. The lender to see the pattern of credit performance looks into your credit report. If there is a change for the better in the recent credit payments compared to a bad credit history, your sincere effort to manage well your credit responsibility has a positive impact on the lender. This raises your low credit score and many lenders agree to grant credit. A friendly relationship with your local lenders also helps, as they know you personally.

There are some companies that have trained employees who work mostly with people with bad credit history. So scout around; there are many lenders in the market, if one refuses there will be another who may accept.

Factors determining your credit scores

a) The chief factor for determining your credit scores is your payment record. This accounts for 35% of your credit score.
b) Your payment tract record information is based on mortgages, credit cards, auto loans etc.
c)Bankruptcy, late payments or missing payments and other adverse financial transactions have a negative impact on your credit score.

Individuals with long credit history have better credit rating vis a vis someone having a short credit history.

Another important factor that affects your credit score is your present overall debt, the credit available to you and the ratio of credit balance to the total credit limit.

The ongoing credit activity like recent application of credit cards, types of credit cards used, and different loans applied for like consumer finance loans, loans in the installment etc., are also considered while computing your credit score.

Credit score – How to rate credit?

Credit scores like any other scores are based on numbers. Higher your scores the better rating you get. Credit scores generally range from a low of 300 to a high of 850.

Credit scores can be either, good, bad or average.

The credit bureau Experian uses the score 677 as an average. A score of 720 or higher is a a measure of good credit rating and results in favorable lending, which helps the customer get lower interest rates

Bad credit history – solutions to repair

It is not easy to overcome a negative credit history. You cannot cancel out late payments or wipe out cancelled debts, but you can rebuild your credit with patience and discipline. Fraudulent or illegal ways to make old debts vanish and establish new credit history with the help of “credit repair service” will compound your problems in getting credit in the future. Rebuilding your credit file is not easy, but it is in your own hands to do so. Credit repair is a possibility for everyone.

You can start by obtaining your credit report through a bureau or by ordering it online, which is easy and inexpensive. Check it to see if the information is accurate and dispute any misinformation. If your debt is considerable and even paying the minimum balance is difficult take help of a credit counsellor. The credit repair counsellor will help you set up a repayment plan, but without a written commitment.

You should sincerely follow the plan, though the counselling doesn’t come in your credit report.
Creditors will inform them about your debt repayment plan, and keep updating it. They inform them about payments that have been skipped or the concessions on your debts. A debt repayment plan thus affects your credit status. Bankruptcy stays on your credit report up to 10 years and so debt repayment plan maybe worth it if it helps you to avoid filing for bankruptcy.

Besides going to a credit counsellor you can plan your own credit strategy and keep track of inquiries in your report by closing unused credit cards and getting one major credit card. If you are unable to get one major credit card apply for credit locally, like a local bank or credit union or department store. Local merchants have lower standards than lenders and will help you pay your bills on time.

Get your loan or credit card application co signed by a friend or family member or obtain a secure card that is guaranteed by you making a deposit with the credit card issuer. Since you’re building a new credit history and a good credit score see that your payments are on time. Thus you can repair your credit history with patients and diligence. Building a good credit future is in your own safe hands.