Understanding Risk and Credit Ratings

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Any consumer who has entered into a billing contract with another party, such as utility bills, loans or credit cards ought to have a credit score - also called a credit rating or credit report - or rather many as there is more than one company that offers these - the largest being Equifax or Experian. By comparing a consumer’s spending and credit history with the habits and credit histories of as many other consumers on record, creditor and agencies are able to place you on a sliding scale that gauges how risky and investment your are. The actual score assigned to you depends on the scale used and the data accessible.

Lenders use this rate to assess how much of a risk it is to lend money to someone. A bad credit rating will reflect a history of failed repayments on credit cards, loan schemes, outstanding bills for home utilities, missed mortgage repayments and overall bad money management. A decent credit score will reflect the reverse of these habits. Somebody with a bad credit rating is likely to be refused loans, finance and credit cards or, if their applications are accepted, they are more than likely to pay bigger rates of interest than individuals with good scores. This is because their rating tells prospective lenders to the chances of them being in a higher risk category e.g. they are more likely to fail on repayments to the lenders themselves.

However, there is always hope - not to mention strategies for improving your credit score. For a consumer to raise their score, it is wise for them to first find out what their rating presently is. Thanks to the 1974 Consumer Credit Act, it is now a statutory right for any person to be given a copy of their credit score. Equifax and Experian are the two leading credit reference agencies. The data that they keep on you can, for a minimal fee be accessed either online or can be provided in a less detailed paper based format.

Prior to applying for a loan, it is a good idea to access both these credit reports so that you can see what the lenders are likely to see when they check up on your credit history, and request for any amendments and corrections to be made in advance.

Money management is the subsequent step. A credit rating can be affected positively by merely making repayments in full and on time, making certain that outstanding charges are consolidated and paid off can also have a positive effect. With each debt and bill being paid off, the score is slowly reversed, until it is able to develop into a good one.

In the absence of obtainable loans or credit to make it easier for them consolidate their debts, many individuals with bad credit ratings turn to credit cards that might be offered to high-risk clients, by many banks. This may be a usable system, but then only if it is operated properly and not allowed to deepen the spiral of debt. It is better for them to be used as a means of support over brief periods of time, with subsequent repayments being made in full so as to avoid incurring any unnecessary interest.

Stability is also a component that can positively influence your credit rating. Home owners are typically preferred over tenants and people who are employed are favoured typically scored higher than the self-employed. Astronomical credit cards debt can also adversely affect your credit rating and as such it is usually a good idea to switch to the best card out there at the time in an effort to make an impact on your borrowings during the introductory period.

Visit Uswitch or The Fool to find the best deal available. We did and discovered that RBS offers a particularly competitive deal on their credit cards - 0% on balance transfers over 13 months plus 0% on purchases over the first 3 months. Ultimately, you will always be better off shedding the credit cards and switching to a personal loan. The Motley Fool can help you to compare unsecured loans in a flash. Some great ones to pick from at the time of writing, for my person circumstances were:

Lender

Finance Type

Typical APR

Alliance & Leicester

Loans

Typical 6.5%

Natwest

Loans

Typical 6.9%

RBS

Loans

Typical 6.9%

ASDA Finance

Loans

Typical 6.9%

* as of 14/09/2007 - source - The Motley Fool - Loans Comparison Centre
* Example repayments based on a loan of £8000 paid over 3 years without PPI

 


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