Credit Rating

Credit rating is evaluating your creditworthiness or your capacity to repay a loan that you have availed. The evaluation is usually done by the credit reporting agencies or the credit bureaus. Earlier, credit rating used to assess the repayment capacity of a borrower but these days, it is also used to determine an individual’s employment, insurance premium etc.

There are basically 3 credit bureaus that carry out credit rating. They are TransUnion, Experian and Equifax. The outcome of credit rating gets documented in a credit report. You can request for your free credit report from all the 3 credit bureaus once in 12 months. Since the credit report is prepared by 3 different credit reporting agencies, information contained in the credit report may differ from one another.

Your credit score is most important of all and it reflects your repayment capacity. The credit score is calculated keeping several aspects in mind. The credit score depends on certain factors like-

•The outstanding balance of your debts. Most of the time if you have exceeded your credit limit, it has a negative influence on your credit rating.

•The type of credit you have availed. Depending on whether it is an auto loan, a mortgage or credit card loans, the credit score is calculated.

•The duration of your credit history is also taken into account. For instance if you have been using credit cards for quite sometime now, you will have a longer credit history than an individual who has just applied for a credit card.

•If you have been regular with your payments and never defaulted, you will have a higher credit score than someone who has paid late fees and default charges.

•Number of debt accounts you have to your credit is taken into account while calculating your credit score. If you have too many debt accounts in a short time span; it has a negative effect on your score.

In a nut shell, your credit rating depends on the following factors-

•Your repayment ability

•The rate of interest your debt accounts are attracting

•How much credit amount have you used

•Your spending habits

Credit rating plays an important role in your financial stability. Your credit rating implies how much a lender is at risk if he gives you credit. If it is found that you are having a low credit rating, as a safety net, lenders usually charge very high interest rate.