How is the credit rating calculated?

Credit ratings are arrived at differently in different countries, but the factors that are considered in doing so are more or less similar, and usually include:

o Payment record - Those who pay their bills promptly stand to benefit when it comes to credit rating since a record of bills being paid overdue will have a negative effect on it.

o Control of debt - Lenders would like to see that clients are not living beyond their means. Experts estimate that under ideal conditions, non-mortgage credit payments each month should typically not exceed more than 15 percent of your income after tax. Those who manage to spend within this equation stand to have a better credit rating.

o Any signs of responsibility and stability - Lenders consider things such as longevity in clients' home and job (at least two years) as signs of stability. Having a respected profession can help improve the credit rating.

o Re-Aging - Through the process called re-aging, a credit history is re-written and you are given a fresh start on the same account. This can sometimes dramatically improve the credit score. In the year 2000, the Federal Financial Institutions Examination Council or the FFEIC clarified the guidelines on re-aging accounts for delinquent borrowers.

o Credit enquiries - An enquiry is a notation on a credit history file and there exist several kinds of notations that may or may not have an adverse effect on the credit score. However, as a general rule, it is best advised not to initiate too many credit enquiries to minimize the chances of this having an adverse effect on the credit rating.

o Cards that are not in use - Although it is common belief that having too many credit cards can have an adverse affect on the credit score, closing lines of credit need not improve the score and might even cause further damages. The credit rating formula usually looks at the difference between the amount of credit you have and the amount that is being used, hence reducing the total credit can make the balance carried seem larger and therefore take points off the score.

Soft pulls do not normally affect the credit score and are seen to be characteristic of the following examples:

A credit bureau may end up selling your contact information to an advertiser who is purchasing a list of people with similar characteristics, like say, homeowners with an excellent credit rating. A creditor can check your credit periodically, or a credit counseling agency, with your permission, can pull your credit report causing no adverse reaction. Each of the preceding examples is commonly known to as a 'soft' credit pull.

However 'hard' credit inquiries are made by lenders and can have an adverse effect on the credit score. Lenders, when granted a permissible reason by you for the purposes of extending you credit, can check your credit history for reliability and stability. Such hard inquiries from lenders directly negatively affect your credit score. Keeping credit inquiries to a minimum can hence help maintain your credit rating, if not cause it to slip. A lender may perceive too many inquiries on your report as a possible indicator that you are looking for multiple loans and will possibly consider you to be a poor credit risk. To maintain your credit rating at good levels, try and avoid letting companies access your credit history unnecessarily.