You hear a lot about your credit rating
and your credit score. You may
know that you’re entitled to get your full
credit report and know how to check your credit
rating. You know that this credit rating is used
by credit card companies and banks to decide whether
or not to issue a credit card to you or loan you
money.
But have you ever wondered
how the heck they come up with your credit rating?
Credit companies have spent a lot of time and money
developing credit scoring systems that compare your
spending and repayment habits – along with
a lot of other information about you – with
those of people who are most likely to pay their
bills on time and in full. They will take your credit
history and your background and assign points to
a number of different criteria, then compare it
to the profile of their ‘ideal’ customer.
The closer you come to the ideal profile the higher
your credit rating will be.
So what determines the ideal profile? It’s
easier to say what is not allowed to be used to
determine credit rating. Under the Equal
Credit Opportunity Act, credit companies may
not use race, sex, marital status, national origin
or religion to determine your credit score. They
are allowed to use age – but must give equal
treatment to elderly applicants. Credit rating systems
are complicated – and not all the same, but
in general, most look at the following things:
Do you pay your bills on time?
Your payment
history is usually the major factor used in
determining your credit score. Because it’s
based on your behavior in the past, it is the most
accurate indicator of your behavior in the future.
Your credit history should show no payments that
are more than 60 days late on credit cards, loans
or utilities. Generally, if there are more than
two late payments shown and they are more recent
than six months ago, your credit rating will suffer
significantly. If you’ve had an account referred
to a collection agency or declared bankruptcy, that
information will be in your credit history and will
affect your credit rating.
How much money do you owe already?
This is called your outstanding debt. Most often,
credit scoring programs will consider how much you
owe in comparison to how much you can borrow (your
available credit based on the credit limits on all
your credit cards combined). If you owe close to
the maximum amount you can borrow, it will usually
lower your credit rating. In other words, if your
credit cards are all close to being ‘maxed
out’, your credit rating will be lower than
if you only have a little owing on each credit card.
How long have you been paying your bills?
The length of your credit history usually has
a major influence on your credit score. If you’ve
had credit for a long time (and it’s been
generally good), it’s a major mark in your
favor. That’s one good reason to get a credit
card while you’re young and keep it current
and in good standing.
Have you applied for new credit cards in the last
few months?
Creditors often look to see if there are inquiries
into your credit score recently. The more there
are, the worse your score will be. If you’re
applying for a lot of new credit cards, creditors
may feel that you’re ‘shopping for credit’
because you’re in financial trouble.
How many credit cards – and what
kind of credit cards – do you have?
There’s a lot of discussion about ‘how
many credit cards should I have?’ There’s
no ideal number, but financial advisors will often
tell you not to have ‘too many’. Generally,
the advice is to have no more than 3 major credit
cards and 2 or 3 store and gasoline credit cards.
Also be aware that loans from finance companies
may negatively affect your credit score –
though paying on them on time may offset their negative
effect.
Other factors that affect your credit score.
Other factors that can affect your credit score
include your occupation, how much money you make,
how long you’ve worked in your current job
and how long you’ve lived at your current
address. They may also include whether you own or
rent your home. Any factor in your credit history
that shows that you are ‘stable’ –
not likely to move or disappear – is a point
in your favor. The longer you’ve been in your
current job and address, the higher the score on
your credit rating.
As of last year’s FACTA law, every consumer
in the country is entitled to receive a copy of
their credit report for free from each of the three
major credit reporting agencies once a year. This
right has been ‘rolled out’ in stages
across the country. By September, 2005, it will
have taken effect in every state in the United States.
You can learn more about getting your credit report
at www.annualcreditreport.com.
