Money

Published on May 21st, 2013 | by Rihana Smith

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The Basics of How Your Credit Score Is Calculated

There can be very few people in modern Western society who do not use credit to some extent or other, which means that our credit score has some impact on nearly all of us, like it or not.

Why it matters

Even if you try not to use credit, there are purchases that it’s simply better to make with a credit card. Car hire companies often require you to use a credit card in order to do business with them. If you want to start a new bank account, even one without a borrowing facility, a bad credit record can cause problems. So it makes sense not to pay more than you have to for borrowing, or to risk being turned down when you want to start an account.

If you are aware of how to maintain a good credit score, then you will be in a better position if you need to borrow or to start a new account. So it’s a good idea to understand the factors that underlie your credit score.

The Factors you can Influence

Credit providers want to see indications that you can handle your finances.

Your credit record will show all the accounts you have had over the last 6 years. It will show any credit defaults, and any court judgments entered against you. Obviously, it is important to avoid defaults. If any occur, dealing with them promptly helps.

A blank credit record is almost as bad as one which contains defaults: people can be turned down because there is no evidence that they have ever used credit. If that’s the case with you, then it’s a good idea to apply for a card with a low limit and use it regularly, paying the borrowing in full every month. That way, a record of responsible use of credit is established.

Other Factors

Other factors that affect your credit rating are less under your control. Your neighborhood will be relevant, and whether or not you are a home owner is also a big factor. Your job and your income are clearly important.

If the above factors are not in your favor, it is all the more important to establish a good history of responsible credit use to provide a counter-balance.

It can be particularly hard for the self-employed to get credit unless they have a strong, unblemished credit history.

Don’t Panic

Although it is a good idea to understand how credit scoring works and its potential impact, you should not overestimate its importance. If you are in financial difficulties, it can be tempting to borrow from one source in order to avoid defaulting on another.

That is a strategy that often leads to debts spiraling out of control, as interest is added to interest. If you cannot afford to service your debts, however hard you cut back on discretionary spending, you need to be honest with yourself and with your creditors. Above all, you should refuse to incur even more debt in an attempt to keep your head above water and protect your credit record.

When you are in a financially better position in the future, that will be the right time to set about repairing your score.

Jeff Noble enjoys passing on his extensive experience as a finance consultant. Through blogging he get the chance to share his knowledge to a vast audience. Visit the learn your ABC’s link for more information.


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