Credit Ratings Overview

Credit Ratings Overview

Many of us may take for granted the significance of maintaining a good credit. Hence, you should be aware that having a good credit allows to qualify for a loan with lower interest rates and favorable terms. For those who can afford paying for a new home, or other properties in cash, you may not necessarily worry about your credit standing. However, to those who rely on loans to acquire assets, having a good credit and maintaining such is essential.

Furthermore, having a good credit isn’t just for showing off. It carried several benefits that is advantageous for you. For instance, if your credit score is good, you won’t have any issues getting mortgage with preferable conditions and terms; plus, the benefit of getting low interest charges, which can help greatly in saving more money.

In this article, we will take a look at the definition and importance of credit as well as an overview about credit rating and the factors of your credit.

Definition and Importance of Credit

Your credit is composed of 3 parts, such as your credit history, credit report, and your credit score. When talking about your borrowing history, this refers to your credit history. This will include a car contract or perhaps any lines of credit that you have in the past; while credit report contains all your credit history in more detail and a consumer-friendly format. The last part that comprises your credit is what most creditors and lenders take a look into to assess your creditworthiness is your credit score. Normally, your credit score should range from 300 to 900.

Significantly, it is highly suggested to review your credit report once a year. In Canada, Equifax and Transunion are termed to known credit reporting agencies. These two agencies keep track of your credit. So, if you wish to review your credit score, you’ll have to pay, but if you prefer to get your credit report copy, you can get one for free in a year. All you need is to download and complete the request forms from the websites of Equifax and Transunion.

Furthermore, if you are thinking to avail for any installment loans or major purchases, knowing where you stand in your credit may help you correct it when necessary. Though it may take some time to get the accuracy of your credit report due to lenders’ delay in reporting your status, if you felt that your score is lower, you can take your time to set up an action plan in improving it.

5 Factors of Your Credit Score

The following factors are impacts your credit scores, hence, understanding each can help you improve or maintain your standing.

1. Payment History

There wouldn’t be any worry in your credit standing if you make sure that your payments are on time. However, the occurrences as follows may affect your payment history in a negative aspect.

• Making late payments
• Abstaining from payments
• Undergoing consumer credit counselling
• Debts forwarded to collections
• Debt Settlement
• Filing for bankruptcy

2. Credit Utilization

Utilizing your credit is a significant factor in your credit score. In utilizing your credit, make sure not to use beyond 70% of your available credit, In fact, the ideal figure when it comes to utilizing your credit should be less than 35%. If you’re getting higher than these figures, it can negatively affect your credit score.

3. Effects of Credit Inquiries

You should only apply for credit at times when it’s badly needed. Too many inquiries and applications can adversely affect your credit score. This is because each time you apply, this will be counted as a credit inquiry. A credit inquiry conveys that creditors or lenders are trying to secure a copy of your credit for the intention to borrow. So, if lenders perceived too many credit inquiries, the fewer chances for you to get accepted.

4. The Length of Your Credit History

Lenders prefer to how consistent are you in terms of your payment patterns and disposition. This means the longer you have your credit account open with its good credit score maintained, the better terms and interest rate offer you can get from lenders.

5. Types of Credit 

Obtaining a single type of credit can hurt your score. You might consider getting other lines of credit and just make sure to responsibly use it. Besides, you have to ensure that you can afford to pay for it each month.

Credit Rating

A credit rating is a system of evaluation of your creditworthiness in general or concerning an appropriate debt or financial commitment. Equifax and Transunion as credit reporting agencies report your pattern of payments and timeline. Though these two are not the only ones who utilize credit rating, your lenders can utilize it as well when reporting your status to credit reporting agencies.

Your credit rating is made of a letter and a number. Below are some information on what these letters and numbers stand for:

The Letter in Your Credit Rating

• I – signifies for installment credit such as a car loan. This is when you owe money for a given time, and you are obliged to pay it in fixed amount regularly until it’s fully paid
• O – signifies for Open status credit which is a line of credit. For instance, borrowing money at times when you need funds up until your limit.
• R – signifies for recurring/revolving credit which is most common; an example would be your credit card. This refers to your borrowing on a regular basis for a specific limit and paying it in variable amounts depending on how much you still owe.
• M – signifies Mortgage loan which pertains to acquiring a home loan.

The Number in Your Credit Rating

• 0 – signifies that your credit account is new and doesn’t have any significant payment history that can be rated
• 1 – signifies that your credit account has been paid upon 30 days billing agreement and is therefore rated to be on time. So, the more 1 rating you acquire in your report, you are likely to get a higher credit score.
• 2 – signifies that there was a late payment between 31 to 59 days. This isn’t terrible though, but it is subjective to lenders points of view
• 3 – signifies late payments between 60 to 89 days. It implies that you missed consecutive payments and may give you a hard time to get accepted in opening up another credit.
• 4 – signifies late payments between 90 to 119 days
• 5 – signifies late payments beyond 120 days, yet isn’t rated as 9 as of yet which would mean that its been written off.
• 6 – isn’t use by any credit reporting agencies
• 7 – signifies that your payments are channeled under a consumer proposal, or through consolidation loans, or under a debt management program initiated by a consumer credit counselling agency.
• 8 – signifies that your creditors are in an attempt to seize your property or assets as part of the claim for debt payments.
• 9 – signifies that debt is considered as a bad debt and hence has been written off. It implies that it has been forwarded to collections or may convey a filing for bankruptcy.

Synopsis

Now that you get a birds-eye view of your credit, what makes it significant and the factors that comprise it as well as what signifies the letters and number in your credit score, you should be able to understand at which status or point are you in terms of your current credit.

Furthermore, if you’re on the verge of getting the worst credit score with your current financial struggle, you might consider exploring your options to get the help that you need by simply completing the debt relief form on this page.