What is a credit history? How is a credit rating formed? What factors can worsen a credit rating? How can you improve it?
Banks and credit organizations, when deciding whether to issue a loan or a credit card, as well as determining from time to time the interest rate, check the borrower’s credit history. Recently, a person’s credit rating has been checked even when they rent a house or apply for a job. A credit rating clearly shows how much you can trust a person.
Since ratings have such a big impact, it’s important to understand what makes credit scores rise or fall.
What is a credit rating?
A credit rating is a certain number that summarizes information from a person’s credit reports. Banks use credit scores and the rating formed therefrom to analyse and predict whether the borrower will return the loan or not; whether to give him money, or better not to risk.
Consumer credit history includes the following data:
- Number and types of credit accounts
- How long each account has been open
- Debt
- Used amount of available credit
- Whether bills paid on time
- Number of recent credit requests
- And others.
The consumer’s credit history also contains information on whether he has had any bankruptcy, deduction, court decisions or fees.
Note that if you apply for a loan it is important to have a positive repayment history. It is difficult to get a loan from the bank, because according to the requirements of banking organizations, the borrower must submit a number of documents, including a certificate confirming the borrower’s financial condition, for example, a certificate of employment.
In most cases, banks decline credit to a person who has a low credit rating, as it means a high risk of late payment. Malicious defaulters are blacklisted and the road to banks is closed for them.
In exceptional cases, banks may issue loans to people with a bad credit history, but under strict conditions, for example, with an increased credit rate or a short repayment period.
That is why people with low credit ratings apply for loans to microfinance organizations and companies. Microcredit companies are characterized by flexible lending conditions. Note that interest rates are higher in microfinance companies, and the term is sometimes shorter, and interest can be calculated even on a daily basis, rather than monthly, as in banks.
What factors can worsen your credit history?
As noted above, a credit history is formed after the client’s first application to a bank or credit institution. Speaking about loans, it is understood that all loans taken are reflected in the repayment history, regardless of the amount and term of the loan.
The consumer should know that all cases when he acted as a guarantor to someone are reflected in his credit history. If someone took out a loan from a bank, and another person became his/her guarantor, then according to the loan agreement, the guarantor bears financial responsibility for the borrower if the latter fails to repay the loan. In this case, delays in the borrower’s loans may affect the repayment history of the guarantor. Everyone should think carefully before agreeing to the role of a loan guarantor.
Overdue payments on the current loan are the main reason for bad credit history. Large banks are very strict about all kinds of delays and in many cases deny even due to delay of a few days.
No one is immune to troubles, people sometimes are unable to repay a loan. They do not refuse to repay, but suffer temporary financial difficulties. In such cases, the borrower should immediately contact the bank which issued the loan. Very often it is possible to come to agreement with the bank, for example, penalty accrual for each day of delay can be suspended. This is the case where the credit history will suffer greatly, and in the event of a repeated breach of the credit obligation, the bank has every reason to commence litigation before the court.
One of the most common reasons for a bad credit history is a delay in monthly payments. In this case, delays occur, but in the end, the client repays the entire amount borrowed. Such a situation occurs due to the salary arrears or miscalculation on the part of the borrower.
There are occasions where people have bad credit history by mistake. Such mistakes may occur due to the fault of the bank, or as a result of the payment system failure. In any case, if a person has discovered a mistake, he should immediately contact the respective authority to correct it.
In order to get the desired amount of money from banks without problems and delays, you should always be in full compliance with a loan agreement and pay in accordance with a repayment schedule. Moreover, it should be noted that if a person has a good credit history and repeatedly applies for a loan, banks may offer more favourable conditions: increase of the loan amount, extension of the repayment period, reduction of monthly interest rate.
How to prevent and correct a bad credit history
To avoid inclusion in the black list and pain in the neck in the event of repeated application for a loan to credit organizations, you should repay your loan obligations in a timely manner. The perfect choice is to pay the loan in advance, that is, a couple of days before the due date.
You may and must correct a bad credit history if you want to take a large amount of money in the future and on good terms. It is clear that banks will not agree to issue a second loan to a person who had problems with repayment of previous loans. The best option is to contact a microfinance company, get a loan and repay it regularly. It should be noted that if a loan is taken and repaid the next day, this procedure may be nullified. You should take a loan for at least six months and regularly repay your loan obligation during these six months.