If you have been looking to take out a loan recently, or any other form of finance, you may have heard of a credit scoring system. However, what is it exactly, and how does it work? We’ll explain more about it below.
What Is a Credit Scoring System?
If you want to take out any credit such as a mobile phone contract, credit card, or mortgage, the company you apply to will use a credit scoring system. This will give you a number for your credit score and the lender will look at this to determine if they should lend you money and how likely you are to pay it back. The higher your credit score, the better.
Here are some factors that will affect your credit score:
No Previous Credit
If you have not had any previous credit, you may think that your credit score will be high. However, this means that there is no information on which to base your score. You are an unknown entity and therefore a higher risk. Your credit score will therefore be quite low. To repair this, get a credit card and pay it off in full every month. This will help you to build up a good credit score.
Too Many Applications
If you have applied for a lot of credit recently, this will impact your credit score even if you were just shopping around and did not actually take out any credit. The fact that you could take out this credit and therefore overload yourself will reduce your credit score. It is best to shop for rates and then find the best one to apply for. This information will stay on your credit file for about six months so your score should start to improve after this time.
If you have missed payments in the past, this will have a negative impact on your credit score. It will make you a riskier person to lend money to, so your score will be lower. To repair this, maintain your monthly payments. Information about your missed payments will affect your credit score for three years after you have caught up with them.
Bankruptcy will have a massive effect on your credit score and you may find that you will not be able to get credit for many years after your bankruptcy has been discharged. This is therefore not something you should do lightly. Only file for bankruptcy if there are no alternative options available to you.
Can You Find Out Your Credit Score?
If you are worried about your credit score or you are simply curious, it is easy to find out what yours looks like and whether you are likely to be accepted for credit. You can use a credit rating scoring system to get this information and then deal with it accordingly.
Hopefully, this has helped you to understand what a credit rating scoring system is and how it works. There are ways to repair your credit rating score and this number is changeable. You can improve yours using these simple tips if you need to.
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