Credit ratings are determined differently in each country, but the factors are
similar, and may include:
Payment record: A record of bills being overdue will lower the credit rating.
Control of debt: Lenders want to see that borrowers are not living beyond their
means. Experts estimate that non-mortgage credit payments each month should not
exceed more than 15 percent of the borrower's after tax income.
Signs of responsibility and stability - Lenders perceive things such as
longevity in the borrower's home and job (at least two years) as signs of
stability.
Re-Aging - Through re-aging, a credit history is re-written and you are given a
fresh start on that particular account. This can dramatically improve the credit
score. In 2000 the Federal Financial Institutions Examination Council (FFIEC)
clarified guidelines on re-aging accounts for delinquent borrowers.
Credit cards that are not used - Although it is believed that having too many
credit cards can have an adverse effect on a credit score, closing these lines
of credit will not improve your score. The credit rating formula looks at the
difference between the amount of credit a person has and the amount being used,
so closing one or more accounts will reduce your total available credit. This in
turn lowers the percentage of available credit, and the credit score will drop.
The credit formula also factors in the length of time credit accounts have been
open, so closing an account with several years of history is another avoidable
credit mistake.
Credit inquiries - An inquiry is a notation on a credit history file. There are
two kinds of notations:
"Soft" Credit Pulls:
A credit bureau may sell a person's contact information to an advertiser
purchasing a list of people with similar characteristics, like homeowners with
excellent credit.
A creditor can check a person's credit periodically.
A credit counseling agency, with the client's permission, can obtain a client's
credit report with no adverse action.
"Hard" Credit Pulls: Hard credit inquiries are made by lenders. Lenders, when
granted a permissible purpose by a borrower for the purposes of extending his
credit, can check his credit history. Hard inquiries from lenders directly
affect the borrower's credit score. Keeping credit inquiries to a minimum can
help a person's credit rating. A lender may perceive many inquiries on a
person's report as a signal that the person is looking for loans and will
possibly consider that person a poor credit risk.
Understanding credit reports and scores
In the United States, once every 12 months, each person is entitled to one free
credit report from each of the three nationwide consumer credit reporting
companies: Equifax, Experian and TransUnion.
The Government of Canada offers a free publication called Understanding Your
Credit Report and Credit Score. This publication provides sample credit report
and credit score documents with explanations of the notations and codes that are
used. It also contains general information on how to build or improve credit
history, and how to check for signs that identity theft has occurred. The
publication is available online at
http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada.
Paper copies can also be ordered at no charge for residents of Canada.
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