How Is Credit Rating Determined? Your Opportunities To Improve It
Credit score affects your financial capabilities. Everybody knows about this, but not everyone has an idea of how it is determined and what it depends on. There are many parameters of your financial behavior that affect your credit rating. If you find out exactly how it is calculated, you can adjust your behavior as a borrower and get additional benefits and financing opportunities. Credit bureaus collect this kind of information to determine your credit.
What is a credit score?
Credit rating is determined by the history of your interaction with creditors for all the time when you use loans. The better you handle your financial obligations, the higher your credit score is. A credit score helps lenders determine how risky you are as a borrower, and whether to deal with you, as well as conditions they can give you for a loan.
There are several credit bureaus in the United States that assess the credit risk relative to each borrower of the country. The ratings of different credit bureaus may differ, although they use the same evaluation criteria. One of the most popular and frequently used credit evaluations is Fair Isaac Corporation or FICO. When you want to check your credit rating, pay attention first of all to the FICO rating.
How is the score determined?
Fair Isaac Corporation does not fully disclose its entire method of calculating the credit rating of borrowers, but we know the component parts of which it is composed.
Payment history
The greatest weight in this indicator is your payment history. This option takes as much as 35% of the total value of your credit rating. This means that how you pay in good faith and on time is most important to your credit score.
The total amount you owe
The total amount of debt also significantly affects your credit. The more you owe to all creditors, the lower your credit score will be. This parameter takes 30% in the overall rating, so it can also greatly change the value of your credit rating.
Duration of credit history
The length of your interaction with lenders gives them information about your reliability as a borrower. Of course, even a long history will not positively affect if it is bad. A successful long credit history is a guarantee of a high credit rating.
Number of new loans
If you have many open credit lines, this increases the risk of non-payment on your part. Frequent requests for new loans also indicate your financial insolvency as a payer, as this is caused, apparently, by an acute need for money and not quite effective management of your finances. This state of affairs lowers your credit score.
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Types of loans you used
If you are able to use various types of loans successfully, this will be a plus for you in the eyes of lenders. Credit cards alone will not increase your credit score. If you have or had used a car loan, student loan, mortgage loan, and any other types of loans before, then you are able to manage your financial obligations.
Let’s sum up about how is credit rating determined
Credit rating is based on your credit history. How you used to cope with your financial obligations tells a lot to creditors about your reliability as a borrower. It is worth considering that even a long ideal credit history will not help you if you have now made a delay in repayment of a loan, or have stopped paying at all. The low balance of your credit cards relative to the open credit limit also negatively affects how is credit rating determined.
On the other hand, even if you have had problems with a loan in the past, then you have a chance to improve your credit score due to honest credit behavior now. This does not happen in one day, but over the course of a period of successful stability, your credit score will noticeably increase.
If you are interested in how you could improve your credit rating, visit our blog every day. There you will find lots of useful information regarding loans. If you have any questions, you can write to us and our experts will advise you and help you decide on further steps to improve your credit rating.
