The Center For Debt Management
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How 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:

    1. "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.

    2. "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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