A Guide To Credit Rating
The objective of this resource is to provide a detailed guide to understanding what exactly a credit rating is, how it is established, and how you can improve it over time.
Firstly however, it must be acknowledged that the concept of a credit rating is actually a myth. Those within the finance industry prefer to define it as a ‘credit score,’ where each lender gives an individual score which is consistent with their criteria of a perfect customer.
What is Credit Scoring?
The reason that lenders assign each individual with a score, is to provide a tool for themselves that assists them in predicting future behaviour of their customers. The score is established based on the financial activity of each customer. For example, if you get a mortgage, car insurance, a loan, a credit card etc, the lender will use this to create your score. All lenders have different scoring systems, such that even if you are rejected by one financial institution, it doesn’t mean that all will reject you. Your credit score also dictates the products you will receive. For example, if your score is too low and you apply for an ‘upper class’ credit card, it is likely you will receive a completely different card than the one you applied for – a card not as good as the one you wanted.
Often people think that there exists a credit rating or credit ‘blacklist,’ but it is important to note that these definitely do not exist. Your ‘creditworthiness’ is not decided in one instance, and even if one lender deems it too risky, this will not remain on your record thus limiting your future borrowing opportunities. Nevertheless, if one lender deems you to be a very risky customer, it is likely that other lenders will also feel this way, so you must make a concerted effort to eliminate those influences which cause this high lending risk.
Another mistake that people often make is assuming that if you are a ‘good risk’ you are automatically going to be accepted by a company. This however is not always the case. There are many cases in which good risks are actually rejected. This is because credit scoring is not about risk, it is about profit! If you are not going to make money for the lender, it is more than likely you’ll be rejected, no matter how risk free you are.
How to improve your Credit Score
This is not an exact science since every lender has a different system for calculating scores, but following some basic tactics and applying a particular behavioural pattern will help improve your credit score. Consider some of the following methods:
- Make sure you cancel all debts, accounts and credit cards that are not in use. Cancelling your unused credit cards results in a reduction of your available credit thus improving your borrowing capabilities.
- Attempt to correct all past problems you may have had with your credit, hence building a better and stronger credit history. Remember that credit scoring is a means of predicting your future behaviour, so having a good credit history will obviously improve the predictions lenders make therefore increasing the likelihood they will take you as a customer.
- Always attempt to keep up to date with any payments on financial products you may have.
- Try to provide evidence of strong foundations and a stable lifestyle. For example, when filling in application forms, providing a land line as your contact number rather than a mobile telephone number will improve your opportunities. Generally, homeowners tend to be in a better position than those who rent.
- Make sure the timing of your applications is appropriate. Many applications within a short space of time can have a negative impact on your credit score. This does not just apply for credit applications, but also for other applications such as mortgages, car insurance, mobile phone contracts etc.
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