How Does Credit Rating Work?

If you are considering applying for a credit card, a home/car loan, or a line of credit, you should be aware that lenders or loan providers would have to check your credit rating. Your credit history would give them the idea about what kind of a borrower you are. If you are suffering from a bad credit, you may not be able to obtain the loan or if you get one, you may be surprised that the interest rate applied could be higher.

Needless to say, your credit rating could possibly bring about great impact to your life. That is why you should always make sure that your credit report is always accurate. You should also understand how your credit rating is compiled and how your financial activities could affect its score. What goes in a credit report? Who generates that information? How would it affect your life? It is just important that you understand how credit rating works.


What is it?

To begin with, credit rating is a compilation of data about how you repay loans or pay your outstanding bills. It also contains information on how much credit you still have, what types of debts you have incurred, and many other necessary information that could be used by any loan provider in determining whether you are a good or bad credit risk.

Take note that credit rating does not directly describe you as a good or bad credit risk. The information contained would be enough to enable loan providers to make that decision on their own. Credit information or record is usually generated by credit reporting agencies, which collect data from lenders, merchants, landlords, utility companies, and many other businesses that transact with consumers. In turn, loan providers have their own set of criteria for evaluating your credit report.


What information does it contain?

Information contained in your credit report usually consists of the following: you personal information, your credit history, public records, report inquiries, and dispute statements. Personal information includes your full name, address, contact number, social security number, birth date, and employers. Credit history consists of records pertaining to your transactions with banks, retailers, mortgage providers, and other finance companies.

Public records contain data that indicate your credit worthiness like court judgments, bankruptcies, and tax liens. Report inquiries indicate parties that have asked for or obtained your credit report. These would give idea as to how often you seek loans and other financial products. Dispute statements indicate how you dispute accuracy of credit records.

The credit score

Credit score is a numerical figure, a summation of ratings provided in terms of each aspect of your financial record. A high credit score indicates your good record, something loan providers would prefer when granting loan applications. Poor credit score indicates that you may have not been responsible or able enough to meet your financial obligations at any point in your life. This could turn off loan providers.

When you seek any loan approval, expect your lender to get a copy of your credit rating. It would not ask from you but it could have the means to obtain such record from third party providers. That is why even without asking too much information from you, loan providers would be able to assess your application based on your financial condition, performance, responsibility, and existing records.

Andrew has been working in the credit industry for several years helping people with bad credit loans and credit card debt consolidation