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How a credit rating works

Whether you’re looking into your credit rating for the first time, are new to using credit or simply want to know more about how a credit rating works, then this guide will talk you through it step by step.

What is credit scoring?

Everyone who has ever got any kind of credit – mortgage, auto loan, student loan or credit card, is considered to have a credit score. But there might be few cases with missing credit score. Such one is when someone is too young and there was not long enough time to build a credit history, and when someone had an already paid credit many years ago and not recently. A credit score is an indicator of how you have handled credit in the past. This is based upon many factors, which we will go into now…

How you have run your credit accounts?

The main factor that affects your credit rating is obviously how you have ran your credit accounts in the past. This includes any loans, credit cards or catalogue accounts that you may have had. If you are, or have been, a consistently late payer, then this will be denoted each and every time it happens. The later the payment, the more detrimental it is to you credit rating.

Have your accounts been passed to debt collectors?

If you’ve had accounts that have been passed on to debt collectors because they’ve reached a stage whereby you could come to no reasonable agreement, then this situation is far from ideal for your credit report. However, as long as you settle your debts with the debt collectors, no matter how long it takes, then you will slowly be able to build your credit rating back up. It’s worth denoting however that closed accounts due to this reason will stay on your credit record for 6 years.

How you have run your bank account?

The way in which you have conducted your bank account is an additional factor that determines your credit rating. Try to stay within your over draft limits, and if possible, avoid ‘being in the red’ at all.

Are you on the electoral role?

Being on the electoral role is important because creditors consider it to be a reassurance that you can be traced should you open an account that goes defunct. Many creditors will reject an application made by a person if the address stated does not match up with the one on the electoral role therefore you should always update your address when you move.

Your credit worthiness will change depending on which lender you’re applying with

Whilst your credit report is a history of your credit, and will not change when a lender looks at it, each lender does has varying things they are looking for in terms of their ideal customer. So, for example, a mortgage lender will demand a better credit history than a poor credit history credit card.

Credit ratings are a complex topic to get to grips with, and there are many factors that determine a person’s credit score. However by doing a little research and by being financially savvy, you can work to build up a credit score from even the worst of financial positions.

You might be interested to know about: free credit Scheck

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