How Credit Ratings Work and How to Improve Yours

How Credit Ratings Work and How to Improve Yours

The saying goes, "A man's money is as good as his credit." American journalist and novelist E.W. Howe (1853–1937)

Credit underpins the American economy. If your credit score is below average, you may find it difficult, if not impossible, to be approved for a loan or credit card. When the economy declines, so does the availability of currency. The rising national debt is a big threat in the near future. The current deficit is quickly reaching four trillion dollars, which is unprecedented in our history. To put it another way, around 20% of every dollar the federal government spends goes toward interest payments.

You might be wondering what relevance that has to your quest for credit. Everything! The available resources are limited. Many people believe that if a government is short on funds, all it has to do is keep the printing machines going overnight. Wrong! That's not how it operates. When taxation and the sale of Treasury notes fall short of covering government expenditures, the government, like a private company or individual, must seek other sources of funding. This is the simple part. No one should be hesitant to give Uncle Sam a loan. 

The tricky thing is that the taxpayer needs to repay the loan. More money is borrowed by the government as the deficit increases. The private sector loses funding as a result. That's bad for the economy as a whole, and it damages people and businesses specifically. It's a self-perpetuating cycle.

This is a brief but crucial report. It's a great resource for learning new things. If you read it carefully, you'll gain insight into the rating process and learn actionable ways to boost your application's ranking. The so-called "Credit Scoring System" is really a numerical calculation. The vast majority of lenders employ a scoring system similar to this one. The more "points" you get, the better you do, as is the case with most games. So, grab a pen and paper because we're going to dissect a standard setup:

Your age is the first unchangeable aspect. It's possible, but you shouldn't lie. Someone, somewhere, has the real story in this age of interconnected computer systems. Although your age is only one factor, if a creditor discovers you have lied about your age, they are unlikely to trust any of the other information you offer and will likely deny you a loan.

Under 21? Do not count this. If you are between the ages of 24 and 64, you get a point. Those of you who are 65 or older receive no points.

Your marital status is the next topic of inquiry. If you're single, most lenders will view you as a larger risk, so I'm sorry. I don't even know what that is. You've tied the knot? Count that as one for you. Divorce is usually ignored by creditors. You get no bonus points if you're divorced and not remarried.

The next question is how many people rely on you financially because, unlike Uncle Sam, who increases your deductions as your family grows, your creditors do not share this philosophy. Have you no dependents? 0 points. Up to three people that rely on you? Put in a point. You have more dependents than three? 0 points. The logic goes like this: if you don't have anyone who depends on you, you have no ties to the community and hence no incentive to repay your debt. If you have a family of three to support, you probably can't just up and leave. With more than three, you run the chance of getting in over your head financially, making you a poor risk once again.

Where do you call home? With your family, friends, or parents in a mobile home or trailer park? Poor response. For the same rationale as in the last inquiry. You could skip town without paying back your loan. You need to establish yourself. Put yourself in the negative column. Put down some rent? Count that as one for you. Have a huge mortgage on a home you own? Well done. A perfect hat trick! Why? If you were approved for a mortgage, someone obviously thought you were a good enough risk to lend to. Have complete ownership of your home? Have you taken's more, it just got better. I'll give you a score of 4. You've proven your financial stability by taking on and repaying a significant debt.

Where did you live before? In most cases, creditors will only extend credit for a maximum of three years. If so, you get no points. You are a restless person. The past five years? Good. Put in a point.

Time in position? The more time, the better. Worked at the current company for less than a year? There will be no rewards for you. From one to three years? Count that as one for you. The score for four to six years of experience is two. 7+ years with the same employer = 3 bonus points.

In what way would you define "job"? Unskilled? You are still awarded a +1. Having a job is better than nothing. Skilled? There are two things to consider. Professional? We'll give you three points for that. The categorization is made by the creditor. When evaluating your performance, use common sense.

Receipts each month? It goes without saying that more is always better. A monthly income of less than $800 gets you one point. The first $1,000 earns you two points. Three points are awarded for a $1,500 pull. Earn an extra point for every dollar over $1,800. This number means different things to different lenders. It all depends on where you live, what you do for a living, and a whole host of other variables.

How much do your current debts total? Two points are awarded for monthly incomes between $0 and $300. Earn one point for every $301 to $500 spent. In most circumstances, you will not receive bonus points for donations beyond $500.

All creditors place a high priority on a borrower's credit history. It's a reflection of your past behavior and might help you plan for your financial future. Every financial institution participates in at least one credit bureau. The spread of knowledge It is preferable if you already have an established credit history with the lending institution. 

Naturally, people put greater stock in their own knowledge than in that of others. That's why most lenders provide four or five points for a loan paid off without incident. Two or three additional points are possible based on your history with other creditors.

Additional Data It's a plus if you have at least $500 in a savings or checking account that you have had for longer than a few weeks. At least two years were needed to have any effect. The majority of lenders will award you a few points. Calling in your stead gains you a further pair of points.

OK, now it's time to add to your total. Keep in mind that the higher your credit score, the less of a danger you are to lenders. Eighteen points is the typical cutoff used by creditors. The range is fifteen to twenty points, with some even lower. Once again, this is subject to the lender's financial stability and inherent prejudice. If at first you don't succeed, try again!

Just a few points from the limit? Maybe you can get away with a little bit of cheating. It's not a good idea, but if you're close, you might be able to convince your boss to pad your hours or raise your salary a little. Increase your score by taking action if you do not currently own your home or pay rent. Getting a secured loan might help you establish or improve your credit history. A credit card will typically be extended to you as well. 

Although not all banks offer this convenience, you might be surprised at how many do. The only catch is that you can't access the funds in the account, and interest will be added to your total credit card balance if you don't pay it off in full every month. Because you are putting up collateral for the amount of the loan, your credit score is not a determining factor. It's a win-win: the bank's risk is mitigated, and your credit score rises. The caveat is that it takes time to establish a good credit history.

Another choice is to put between $200 and $500 into a standard savings account. Put it away for 30 to 60 days, and then use the account as collateral for a loan. Prepaying a loan means paying it off early. Take out some, or all, of the cash. Start banking with a different institution. Iterate the steps as many times as necessary. There will be no need for protected accounts, and you should find it much simpler to obtain credit once positive reports about you have been sent to your local credit agency. If you've exhausted all other options, look into getting a lower loan or trying to find a cosigner.

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