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credit rating is determined Credit ratings are determined differently in each country, but the factors are similar, and may include:  Payment record: A record of bills being overdue will lower the credit rating. Control of debt: Lenders want to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrower's after tax income. Signs of responsibility and stability - Lenders perceive things such as longevity in the borrower's home and job (at least two years) as signs of stability. Re-Aging - Through re-aging, a credit history is re-written and you are given a fresh start on that particular account. This can dramatically improve the credit score. In 2000 the Federal Financial Institutions Examination Council (FFIEC) clarified guidelines on re-aging accounts for delinquent borrowers. Credit cards that are not used - Although it is believed that having too many credit cards can have an adverse effect on a credit score, closing these lines of credit will not improve your score. The credit rating formula looks at the difference between the amount of credit a person has and the amount being used, so closing one or more accounts will reduce your total available credit. This in turn lowers the percentage of available credit, and the credit score will drop. The credit formula also factors in the length of time credit accounts have been open, so closing an account with several years of history is another avoidable credit mistake. Credit inquiries - An inquiry is a notation on a credit history file. There are two kinds of notations: "Soft" Credit Pulls: A credit bureau may sell a person's contact information to an advertiser purchasing a list of people with similar characteristics, like homeowners with excellent credit. A creditor can check a person's credit periodically. A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action. "Hard" Credit Pulls: Hard credit inquiries are made by lenders. Lenders, when granted a permissible purpose by a borrower for the purposes of extending his credit, can check his credit history. Hard inquiries from lenders directly affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries on a person's report as a signal that the person is looking for loans and will possibly consider that person a poor credit risk. |
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Understanding credit reports and scores In the United States, once every 12 months, each person is entitled to one free credit report from each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score. This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online at http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada. |