With the majority of jobs available being part-time, people have become increasingly dependent on using their credit cards. It is very important that you understand your credit reports and your credit.
When you use credit, you are borrowing money that you promise to pay back within a specified period of time. A credit score is a statistical method to determine the likelihood of an individual paying back the money he or she has borrowed.
There are three credit bureaus, Equifax, TransUnion, and Experian. They have different evaluation systems, each based on different factors. Some may take into consideration only the information contained in your credit report, which we look at below. The primary factors used to calculate an individual’s credit score are his or her credit payment history, current debts, time length of credit history, credit type mix and frequency of applications for new credit. Because the scoring systems are based on different criteria which are weighted differently, the three major credit bureaus in the U.S. may issue differing scores for an individual, even though the scores are based on the same credit report information.
The higher your score, the better. They may range from 350 (extremely high risk) to 850 (extremely low risk).
What About A Credit Rating?
In addition to using credit scores, most countries (including the U.S. and Canada) use a scale of 0-9 to rate your personal credit. On this scale, each number is preceded by one of two letters: “I” signifies installment credit (like home or auto financing), and “R” stands for revolving credit (such as a credit card.)
Each creditor will issue its own rating for you. For example, you may have an R1 rating with Visa (the highest level of credit rating), but you might also have an R5 from MasterCard if you’ve neglected to pay your MasterCard bill for several months. Although the “R” and “I” systems are still in use, the prevailing trend is to move away from this multiple rating scale toward the single digit FICO score. Nevertheless, here is how the scale breaks down:
|R0 or I0||You are new to the credit world, and you have an insufficient credit history for making an accurate judgment of your future risk.|
|R1 or I1||You pay your credit back in 1 month.|
|R2 or I2||You pay your credit back in 2 months.|
|R3 or I3||You pay your credit back in 3 months.|
|R4 or I4||You pay your credit back in 4 months.|
|R5 or I5||You have not repaid in four months, but you are not a “9” yet.|
|R7 or I7||Your debt payments are made under consolidation.|
|R8 or I8||Debt was cleared by selling the item (repossession).|
|R9 or I9||You officially have bad debt, which usually means it is uncollectible.|
What Makes Up Your Credit Score?
When you borrow money, your lender sends information to a credit bureau which details how well you handled your debt. Based on that information, the credit bureau determines a credit score. They use five factors:
1. previous credit performance (given at weight of about 35%,
2. current level of indebtedness (30%),
3. time credit has been in use (15%)
4. types of credit available (15%)
5. pursuit of new credit (55).
Your credit rating is most affected by your history of paying off your debt. This is the factor that can boost your credit rating the most – paying off your debts quickly. Also maintaining low levels of debt, having a long credit history, and refraining from constantly applying for additional credit will all help your credit score.
When you apply for a credit card, mortgage or even a cell phone, your credit rating is checked. Depending on your credit score, lenders will determine what risk you pose to them. Your score (historical credit records) will determine first, whether or not you will receive credit, how much you will receive and what your interest rate will be. So, if you have a low credit score, lenders will lend you money at a higher rate than the one paid by someone with a better credit score.
The importance of credit today is significant; overlooking this fact can be very detrimental to your financial health. Maintain or improve your credit score by keeping low debt balances and paying credit off on time.