Personal Finance Articles

A credit score is generated through a mathematical formula and then comparison of the consumer's spending and credit history with the habits and credit histories of additional consumers. The resulting figures are then converted into a rating that is used by would-be lenders. Lenders use this score to evaluate how much of a risk it is to lend money to someone. A bad credit rating will reflect a history of failed repayments on credit cards, loan schemes, outstanding bills for home utilities, missed mortgage repayments and overall bad money management. A good credit score will reflect the converse of these habits.

A person with a bad credit score is likely to be refused loans, mortgages and credit cards or, if their applications are accepted, they are likely to pay bigger rates of interest than those with decent scores. This is because their score tells likely lenders to the possibility of them being in a higher risk category e.g. they are more likely to fail on repayments to the lenders themselves. However a credit score can be affected favourably as well as in a damaging way, even if a consumer presently has an unfavourable credit report. For a person to enhance their score, it is wise for them to above all find out what their score already is.

Thanks to the 1974 Consumer Credit Act, it is now a statutory right for any person to receive a copy of their credit score. Equifax and Experian are the two biggest credit reference agencies. The information that they keep on you can, for a small fee be accessed either online or can be given in a less detailed paper based format. Before applying for a loan, it is a good idea to access both these credit reports so that you can see what the lenders are likely to see when they check up on your credit history, and apply for any changes and corrections to be made in advance.

Money management is the next recommended step. A credit rating can be affected favourably by merely making repayments in full and on time, making sure that outstanding bills are consolidated and paid off can also have a positive effect. With each debt and bill being paid off, the rating is slowly reversed, until it is able to become a good one.

In the absence of available loans or credit to make it easier for them consolidate their debts, many people with negative credit reports turn to credit cards that are offered to high-risk clients, by many banks. This may be a usable system, however only if it is administered properly and not allowed to deepen the spiral of arrears. It is better for them to be used as a means of support over short periods of time, with subsequent repayments being made in full so as to avert incurring any unnecessary interest.

Better credit reports are also typically handed out to homeowners than tenant as this is judged to be an indication of stability. Likewise, employees are normally rated higher than the self-employed. Excessive credit cards debt can also adversely affect your credit score and as such it is usually a good idea to change to the best card out there at the time in an attempt to make an impact on your borrowings during the introductory period.