Credit Score Rating

Credit Score Rating

When you use credit, you are in effect borrowing money from the lender and promising to pay it back on time. Now, the lender, being a businessman, will want some guarantee that you would indeed repay what you owe. After all, it is his money and once lost is lost forever.

So if the lender finds that you are not a good credit risk, your loan application will get denied or you will get approved but for terms that you may not find desirable. Seeing as how it is vital for the lender to know the risk beforehand, the need for a system that could accurately determine a person’s future credit performance arose.

The credit score rating system is such a system. It takes into account various aspects of a person’s finances, including payment history, available credit, credit history, types of loans, new accounts, debts owed, etc. in order to arrive at a three-digit number, known as your credit score.

With the help of a credit score rating system, lenders now have a tool to use in order to precisely determine the likelihood that you are going to pay back what you owe. So that if your credit score rating is high or above average, then this is indicative of your future payment behavior.

The credit score rating system would help lenders arrive at loan approval decisions faster and more accurately. In addition, the score would also help them determine what loan terms to offer to you based on your credit standing as revealed by your score.

So where do the lenders get your credit score rating from? Well, there are three major credit bureaus that keep a record of your credit score. These are Equifax, Experian, and TransUnion.

But since these bureaus use different evaluation systems for their credit score ratings, each based on different factors, it is highly likely that your credit score issued by one bureau is different from those issued by the other two. What’s more, some lenders formulate their own evaluation procedures to calculate your score.

There is no sure way to determine what factors are used in calculating credit score ratings, but there are quite a few that remain more or less constant. These include:

* Debt and payment history on credits, such as credit cards, student loans, consumer loans, car loans, among others
* Current debts
* Time length of credit history
* Credit type mix
* Frequency of applications for new credit or inquiries for new credit
* And other factors that may be taken into account, such as tax liens, judgments, and bankruptcies

These are all information found in your credit report. When these factors are broken down, it would show that your payment history or propensity for paying off your debt has the highest percentage – meaning, it is heavily weighed factors in your credit score rating.