The Importance of Your Credit Rating: What It Says About You
As people have become more dependent on credit to purchase homes, cars and more, the importance of your credit rating has also increased. Often times, people don’t understand what affects their credit reports or rating. Most people don’t understand that their credit rating is one of the most important things they can ever own and the importance of protecting it. If you don’t understand something, how can you protect it?
Every time you use credit, you are borrowing money from someone else. You promise to pay each amount back within a specified period of time. Your lender uses the amount you borrow, the interest rate and the length of time you are going to borrow it for to determine your monthly payments. You absolutely, positively have to make each monthly payment, and pay it on time. Your credit score is a statistical number that shows the likelihood of your paying the lender back. Your credit score isn’t just a number that the credit bureaus get out of thin air. It is precisely derived from a set formula.
Each credit bureau uses different criteria for calculating your credit score. However, they each use the same basic formula and come up with basically the same number. One credit bureau might only look at your credit report, while another may use more than one factor. Either way, each bureau gives you an accurate rating based on your credit.
There are many factors that can be used when determining your credit rating. Your payment history, the amount of your current debt, the length of time in which you have had credit, the mixture of different kinds of debt that you have, and the number of inquiries on your record. The more loans you are trying to take out (inquiries), the more it will drag your credit down. Your credit score will also be lower if you haven’t had credit or used credit for a very long time.
Credit scores range from 350-800. The higher your credit score, the better it is. If you have a lower credit score, lenders view you as a higher risk than someone with a higher credit score. In other words, someone with a credit rating of 350 is going to be a bigger risk than someone with an 800 score.
So, why is your credit rating so important? Every time you apply for a loan or even hook up your utilities, your credit is checked. Your credit rating is the easiest way for lenders or utility companies to see what kind of risk you are. The higher the risk you are, the more your payments will be. This is according to financial theory. Theoretically, higher credit risk means that a “risk premium” must be added to the amount that you borrow. Risk premium helps protect lenders, mortgage companies, credit card issuers and others that may loan you money. Imagine what would happen if lenders gave everyone the same rate and same amount of money. Some people would pay it back faithfully, while others took advantage of the system.
Credit ratings are a fragile thing. You need to protect your credit score with everything you’ve got. If you make your payments on time, be careful about how much you borrow and make wise purchases, you should be fine. Understanding what your credit rating is and what it is saying about you could save or cost you.
Related Posts
Tags: credit, credit advice, credit history, credit report, credit score