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How Does Credit Scoring Work?

We often here about credit scoring but there seems to be a bit of a mystery about how it actually works. It can be useful to get an idea about this though as you will then be able to make sure that you do what you can to make your credit score is as good as it can possibly be. So, a good start is to know how it works and then you can do what you can to make it as good as possible.

How Does Credit Scoring Work?

Credit scoring actually does not really exist. All of us have a credit report which has our financial details laid out in it. Then different people might look at it to decide whether they want to take us on as a customer or lend us money or whatever. Unfortunately, each of them has a different way of deciding this and there is not a standard scoring system that can be used which will allow us to see where we stand. This makes it more difficult for us, especially when we know that some lenders, for example want to see that we repay everything on time all of the time and some might be happy if we miss a few repayments as they will know that if we do that when they are lending us money, they will be able to charge us a fee and that means they will make more money from us. This therefore means that it is not easy to know exactly what to do in order to make our credit record look really good. However, there are a few common sense things that we can try.

How Can I Make Mine Good?

It is wise idea to make payments and repayments on time and in full. Although there is a chance that some lenders may not mind if we do not do this, it is a good idea to make sure that you do make them on time. This is because you do not want to have to pay the extra charges that will come about if you are late with paying them. You do not want to risk paying something late and paying the charge just in case one lender might be okay with it. It is far better to pay things on time as more lenders or others looking at your credit report are likely to want to see that.

It is also important to check your own credit report and make sure that it is correct. Sometimes it can have incorrect information on it which might be used against you. For example, you may find that there are details of a loan, which you have actually paid off or things like that so just check it and get anything changed that is incorrect.

If you do not have your name on many bills, then you will not have much evidence of making regular payments which might work against you. Therefore, it can be wise to have your name put on to things like utility bills and insurance premiums so there is evidence of you paying things. However, only do this if you are confident that the bill will always be paid on time as having evidence of things being paid late is going to work against you. Generally, it is the case that if you do things that advantage you money wise, such as paying things on time, paying off loans early and not borrowing too much money, then it will look good on your credit report as well so this is worth bearing in mind.

Why are People so Interested in my Credit Score?

You may just wonder why people are interested in your credit score and wonder why it is so important to make sure that you credit report looks good. It is worth understanding what sorts of things people are looking for and this will help you to know whether you should be trying hard to make your credit report look good or whether it is not really that important.

Trust for Paying/Repaying

Those looking at your credit report will be looking for different things, but one of the main things that they will be looking at is whether they can trust you to make payments or repayments when they are required. Often those looking at the credit report will be lenders or those that you will potentially be paying regularly and this means that they will want to make sure that they feel you will be able to do this. They will take a look at what you are paying for right now and whether you are making payments on time and that will allow them to judge whether they think that you will be able to pay them. If there are any missed payments or repayments that will cause concern that you might not be able to afford to cover their payments and it might put them off taking you on.

That You Can Afford Things

There will also be those that want to check that you will be able to afford to buy things off them. They will want to see whether you will be able to afford to make their payments on top if all of the other commitments that you have and so they will study this carefully. If you have a lot of loans that you are repaying or lots of other bills and commitments, they may worry that you will not be able to afford theirs. If you have a lot of loans, they may also worry that it might look like you are desperate for money and are not good at managing money so this might make them worry about whether you will be able to afford to buy from them as well.

Good History

They will not just be looking at what you have been doing lately but will look back as well. If you have had trouble in the past, then this will show on your credit report and it could make some people feel that you cannot be trusted. They may worry that if you have had problems in the past, then there is a big chance that there will be problems in the future and this could put them off.

So, as you can see, there are quite a few things that people will be looking at when they are looking at your credit report. So, whenever you want to borrow money or take on something that needs regular payments such as rent, utilities or insurance, then you credit report will be scrutinised to see whether you can be trusted. It can be extremely important to those people as they will want to make sure that they get their money and that is why they will look carefully to see whether they feel that they can trust you. It is therefore important that people try as hard as they can to keep their credit report looking good. Try to pay for everything on time and they will really help. So, try not to take on more than you can manage and make sure you think carefully about every financial commitment that you make and this should be able to help you.