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Factors That Can Affect Personal Credit Ratings
The three major credit reporting agencies
use complex, proprietary algorithms to produce numerical ratings for
individuals. The scores are supposed to reflect a person's ability to repay a
debt. Lenders rely heavily on TransUnion, Equifax, and Experian reports to
evaluate loan applications. Generally, there are several categories that range
from poor to excellent. The agencies do not publish the mathematical formulas
that are used to determine scores. Those are closely guarded trade secrets.
It is widely known that several factors can
have a direct impact on someone's chances of getting approved for a loan.
Obviously, a recent bankruptcy can mean immediate denial, but there are
exceptions to that rule. In a similar way, individuals who cosign on loans for
others can put themselves into precarious financial positions. Other factors
that come into play include credit usage, late payments, total amounts on loan
balances, legal disputes with creditors, and reporting errors by agencies. If
you intend to borrow money for any purpose, learn about the central components
of scoring to maximize your chances for approval.
Bankruptcy
By law, consumers are entitled to one free
report each year from the three bureaus. If you have ever filed a bankruptcy,
use the free information to do an annual check on whether the event is still
showing up on one or more of the official documents. In most cases,
bankruptcies disappear after seven years from the date of filing. But
sometimes, the negative
impact dissipates after about four years. It depends on the chapter of the
bankruptcy law you filed under, the amount of debt that was discharged, and
several other factors. Note that people who designate themselves legally
bankrupt are not barred from borrowing money. Certain lenders specialize in
financing applicants who have negative financial histories.
Cosigning on a Student Loan
There are numerous situations in which it
makes good sense to help a friend, child, or employee gain approval on a
student loan application. But it's important to remember that there are pros
and cons of cosigning a student loan, and sometimes it is not wise to
append your signature to someone else's official documents. The best way to
find out how to proceed is to review an informative, reliable guide that
discusses all the advantages and disadvantages of serving as a cosigner on a
student loan.
High Credit Limits and Usage
Scores are extremely sensitive to an
individual's usage
of allowed credit. If a card's limit is $3,000 and the holder's balance is
$2,500, that indicates the use of slightly more than 83% of the total. Many
cardholders choose to pay off the entire amount when bills come due, which puts
usage at zero percent. To avoid suffering a negative effect, maintain balances
less than 30% of the limits. In the case of a $3,000 spending limitation, it
would be smart to keep the amount below $900, or 30%. Because ratings are
supposed to indicate a person's ability to repay indebtedness, cards are viewed
as a solid, realistic barometer of that parameter.
Late Payments
Note that not every bill you pay goes into
the bureaus' calculations. Utility companies rarely report consumer payments.
The same goes for most medical facilities, apartment complexes, and cable
companies. So, making on-time payments to those creditors won't necessarily do
any good. But late payments can hurt you if the apartment owner or cable
company decides to turn your account over to a collection agency. Then, the
debt will almost certainly show up as "Late by x months" on official
reports. That's a problematic scenario because it can take up to a year or more
to remove late citations even after you settle the debt completely.
Incorrect Data
Mistakes creep into official data. That's
why those who have excellent scores continue to order the annual free reports.
When you find a mistake, contact the agency directly via their approved method
of communication. Usually, that's snail mail, which means getting a slow
resolution to any problems. However, if you can document the error and show
that a specific listing does not belong to you, they will usually remove it
within 30 business days.
