At the dawn of retail lending in the US, in the mid-2000s, almost anyone could get a loan. Today, credit history is the most critical factor in deciding whether to approve or reject a loan application. The banking sector has faced several problems, due to which it suffered losses and managed to accumulate credit history data that allow identifying bonafide and unscrupulous borrowers.
What is a credit score?
A Personal Credit Rating (PCR) – either a score or an indicator of financial health – is based on all the records of your credit history. In other words, it explains the applicant’s chances of obtaining a loan or mortgage from a bank. According to him, financial institutions judge the good faith of the borrower. Today, a standardized system for evaluating borrowers’ “credit quality” has been developed. A credit rating is a tool for self-assessment of one’s ability to obtain credit products. Receiving such an analysis, a person not only immediately understands how “quality” his credit history is but also what specific conditions on bank loans he can count on.
How is a credit score calculated?
The credit rating is formed based on:
- Conscientiousness in fulfilling obligations to creditors: Timely repayment of loans
- Loan diversification: The use of different types of loans, even multiple ones, has a positive effect on the rating, while an excessive number of loans of the same type is negative.
- Length of credit history: This indicator reflects the borrower’s experience in lending.
Since the credit history, you updated the period: Fresh entries have a more significant impact on RCC than old ones.
Do not forget that not only applicants with a low scoring rating fall under the suspicion of banks, but also those who have no rating at all. These are people who have never taken out a loan. That is why it is difficult for young people aged 22 to 25 to get a loan. The optimal age for opening a credit history is about 27 to 35. It is recommended to start by opening a credit card for a small amount and return the funds on time to form a portrait of a conscientious client.
Why do you need a credit score?
Different experts in determining credit rating use their rating scale. But in general, the logic is simple: the higher the value of a personal credit rating, the higher the probability of getting approval from the bank. A credit score does more than make it easier to get loans. It has other benefits as well like:
Tracking personal Financial Health
The rating helps to exercise self-control over the number and frequency of loans. A low rate indicates a high level of debt, leading to personal default. For example, if it takes more than half of the salary to pay off a loan, financial health is at risk.
Detection of fraudsters
The credit rating reflects all activities related to obtaining loans. Thus, it is likely to identify fraudsters who have issued a loan for another person.
Increasing Financial Literacy
The score helps you evaluate financial behavior and develop healthy financial habits. For example, if a borrower notices that his rating has gone down because he took out ten loans in the last year, this will be an occasion to reconsider consumption and personal spending.
How to find out your credit score?
The rating itself is formed based on the borrower’s credit history. It considers many elements – for example, the number of open and closed loans and the total debt burden. It is important how a person has serviced or is servicing loans, what kind of loans they were, and what amounts and terms. But the most important thing is the existence or lack of delays. A specific score is formed—the more elevated this score, the lower the borrower’s credit chance level. Based on the level of a particular credit rating, banks choose whether to give a loan or not. For the borrower himself, this is a chance to look at himself through the eyes of the bank and evaluate his possibilities of obtaining a mortgage. The borrower understands how good his credit history is and what specific conditions on bank loans he can count on.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.