Credit rating is an estimate of an individual’s credit worthiness. The term can also be used to measure the financial soundness of a corporation as well as that of an entire nation. A credit rating is calculated by taking into consideration an individual’s financial history and his/her current asset to liability ratio.
Credit Rating: Application
Credit rating depicts an individual’s ability to pay back a mortgage or a loan. Hence, it is primarily used by lenders and investors. A poor credit rating signifies greater risk of defaults on loans, and thus leads to higher interest rates or refusal of loans altogether.
Credit ratings are also considered by various stores and merchants while accepting checks. Moreover, credit ratings are increasingly being used for advanced functions, such as:
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Adjusting insurance premiums
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Establishing the amount of leasing deposit and
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Determining employment eligibility
Factors Affecting Credit Rating
Some telling factors that affect an individual’s credit rating are:
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Payments: Timely payment of bills is the most important feature of an individual’s credit history. Late payments or defaulted payments lower the credit rating to a great extent.
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Amount of Debt: The greater this amount, the lower the credit rating. Hence, while using a credit card, it is advisable to keep your outstanding balance less than 30 percent of your credit limit.
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Amount of Credit: Credit rating is inversely related to the amount of credit. Too much credit and a lot of credit inquiries lower the credit score. This is because having too much credit makes the lenders anxious, since there is a greater possibility of maxing out the credit.
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Major Financial Events: Events such as bankruptcies and foreclosures take a huge toll on the credit rating.
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Employment: Individuals with a sound and consistent employment track record have a good credit rating. Unemployment and absence from work tends to lower the credit rating, as it retards the capability to make payments.
A credit rating score is instrumental for accessing various sources of finance and overlooking its significance could be very detrimental to one’s financial health. Hence, an individual must not only create a good credit rating but sustain one as well.