Your credit rating is one of the most important numbers you’ll ever be associated with. Your credit rating can have a big impact on your life, by determining whether you can successfully buy a car, get a loan, successfully apply for credit cards or take out a mortgage on a house.
If you have applied for a loan, a mortgage, a credit card or even a mobile phone plan within the past five years, you have a credit rating. The file contains a ‘score’ or rating, which credit unions, building societies, banks, credit card companies, and many other businesses base their credit decisions upon when you submit an application for any credit.
What is a Credit Rating?
A credit rating is a measure of risk based upon the information in a person’s credit file. The ratio informs a lender of the likely risk that the lender will take when providing credit to that individual.
A person with a history of defaults, late payments and bankruptcies will have a low credit rating. That makes him or her a poor credit risk who is likely to default on a loan, based on past performance. A lender that sees a low credit rating might decide not to give credit, limit the amount of credit extended, or charge a higher interest rate to offset the perceived higher risk.
A person with a credit history of always paying off loans and making loan payments on time, on the other hand, will have a high credit rating. Such an individual would be eligible for larger loans, and higher credit limits, with lower interest rates, subject to the proven ability to repay any new credit provided.
Your income does not directly influence your credit rating. The credit rating is based on your past credit history, not the amount of money in your bank account. It is possible for a wealthy person to have a poor credit rating, and a person without money to have a great credit rating.
How to Protect Your Credit Rating
Credit files are maintained by companies called credit bureaus. The bureaus collect specific credit related information, which they use to calculate your credit rating.
This information that the credit bureaus collect includes:
Any financial activity on your part, even filling out a loan or a credit card application, can change your credit rating. This is why we recommend that you do not apply for loans at several financial institutions at once. All those applications and any rejections will appear in your credit file and potentially lower your credit rating.
At Holiday Coast we have a wide variety of tools, including, Budget Planners and Savings Calculators you can use to help you plan for and manage your finances.
This article provides general information only and should not be relied upon as financial product advice.