Credit risk score is a numerical tool that is used to assess your
credit worth. It very accurately indicates your financial responsibility and is
used by financial institutions and lenders to determine your
creditworthiness,your eligibility for
approving loans and the rate of interest to be charged on your loans. Be
it mortgage lenders, credit card issuers they all check your credit score
before approving your application for credit.
The credit risk score range is usually between 300-850.A higher
credit score is more preferable as it shows superior credit history.A person
with higher credit score will have more of lenders competing for his business
with lower interest rates and good terms on loans.
An individual with a lower credit score on the other hand
will be granted loans at very high rates of interest and may even find it
difficult to convince lenders to put up their money
A good understanding of how credit score works can make you
help you in making wise financial decisions that can lead to low borrowing
costs for you.
Credit risk score is basically governed by three major factors
which contribute towards determination of overall credit score
The first factor is making payments on time-Paying your
bills and dues on time is one important element that contributes in assessing
your credit score .More than 1/3 of your credit score is determined on the
basis of whether bills have been consistently paid by you on time. for
calculating credit score more emphasis is given to recent activity of the past
24 months.Every late payments made by you will badly hurt your credit score and
bring it further down.Paying your bills on time can definitely give you a
fairly good credit score.
The second factor is
your outstanding debt-The higher your outstanding debt,the less attractive you
will be as a borrower for potential lenders and less likely that you will be
able to convince them to grant you loans at reasonable terms.(in other words
new loans will be issued to you at extremely higher rates of interest ,with higher
collateral requirements and with additional documentation requirements.
A higher outstanding debt will bring down your credit score
drastically. Try to keep a low debt –income ratio for getting a good credit
score.
The third factor involves other consideration which
determine the credit score sucha as :
The length (duration) of the borrower’s credit history
Different types of credit a borrower has-credit
cards,mortgages and other loans
How much new credit the borrower has recently received-too
many new credit applications means financial irresponsibility by the borrower
and will bring down his credit score.
The duration or length of time the borrower has had a good
credit history.
The lenders or creditors
are usually focus on two aspects
of your credit history-the first aspect is how good has been your payment
history and second is your total borrowings history
For eg-If your debt outstanding is very high and the fact you have been very regularly paying your debt it is unlikely that the lenders will lend you
money.
If you have never ever borrowed any amount of money ,this might make the creditors cautious
and they may not approve your application for loan.
If you have borrowed money(like financing a car or home
loan) and have successfully paid it off then you represent the image of a
responsible and reliable borrower to the lender.
To sum it up ,your credit risk score is a sum total of
Your payment history-35%
your credit-debt ratio-30% your credit history-15% your new applied
credit-10% and your credit types-10%.More than 90% of your credit score number
is based on the past 24 months activity done by you.The older your bad debts or
negative accounts the less likely they are to affect your credit score.
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