How Good Is Your Credit Rating?

The Three C?s Of?Your Credit Rating

In the days before computers and credit cards, loan officers usually sized up applicants on the Three C’s of Credit:

  • Character (a moral commitment to pay the money back),
  • Capacity (the means to do so) and
  • Collateral (property that could be seized and resold in the event repayment was not made).

The Three C’s are still important in securing loans, but creditors today are more apt to rely primarily on computer models and statistical graphs that rate by points the typical characteristics of people who do, and don’t, repay their debts.

According to a California firm that develops such systems for banks and other creditors, only about 20 to 30 percent of all credit applicants get enough points to be approved. While each institution has its own system, Consumers Union, publisher of the magazine Consumer Reports, analyzed some common denominators and came up with the hypothetical scoring test shown below.

Generally, the older you are the better credit risk you are in a lender’s eyes. The points, however, drop noticeably for people in their mid-30’s, a group that often faces the unforeseen expenses of young children, divorce or other causes of financial stress.

The longer you have lived in one place the more lenders see you as a “stable” person, and if you own rather than rent your home, you score extra points. People with cars rate higher than those without, and the newer the car the more points you are apt to get.

Another consideration is how long you have held the same job. What kind of job you have — an executive rates higher than a cab driver — and your income, of course, make a difference.

Having a savings account is better than having a checking account, and you are considerably more desirable if you have both. If you have taken out an installment loan from your bank, and are repaying promptly, you will get a few more points.

People who already have one or more credit cards in good standing are considered better risks than those with none. Department store charge cards, travel and entertainment cards and oil company cards rate somewhat lower, and off-the-cuff credit with, for instance, the local drug store, which is not punched into a national credit-reporting system, ranks even lower than that.

If you have been desperate enough to have borrowed recently at high interest from a small-loan or finance company, you will probably be docked a number of points. If you have applied and been turned down for credit more than once in the last six months, and that fact appears on your computerized record with a credit-reporting agency, you may have difficulty getting new credit, as you may if your record indicates that you have not been prompt in paying your bills.

If you have gone through bankruptcy in the last few years, you may have to forget credit completely, unless you have solid evidence that you are back on your financial feet.

Read here How to Calculate Your Credit Rating?