Credit rating — what is it?
A personal credit rating is a score assigned to a potential borrower based on their credit history. Credit departments calculate it automatically based on several variables: the number of open and closed loans, debt load (what percentage of total income is spent on paying loans), overdue debt, the presence of debts sold to collectors, etc. It is an analog of bank scoring.
What is the difficulty in defining clear criteria for a good rating?
The main question a borrower should be concerned about is: which credit rating is good and which is bad? It is challenging to define clear boundaries. Why? When deciding whether to provide a loan, all banks look primarily at the quality of the credit history and personal data of the borrower. However, they can make different decisions because they set other goals and use different evaluation criteria. To assess the credit score ranges of consumers straightforward and easy to interpret, so-called creditworthiness scores are determined, which express the probability of your solvency and reliability. Even if the respective credit agencies determine different score tables, the following credo usually applies: the higher the score, the better the credit rating.
When is a person considered creditworthy?
The credit score is an essential component in assessing an individual's creditworthiness. After all, a high score automatically sends the message to a company that a creditworthy individual is automatically paying their installments and bills. By taking these credit scores into account, lending companies decide to what extent and under what conditions a contract is concluded.
Numerous people wonder what is decent credit. The rule of thumb is that the higher this score, the better the conditions for a successful business relationship with favorable conditions. In return, the lower the credit score scale, the worse your creditworthiness. In the eyes of the companies, this rating increases the risk that a payment default could occur. Reasons for a good and bad credit rating are, for example, if invoices were paid late or not in the past.
How is the credit rating calculated?
Although the algorithms for calculating good and bad credit scores are subject to the business secrets of the respective credit agencies, some factors that are relevant to the calculation are still known:
Payment experiences: Payment irregularities, but also positive characteristics, such as the successful and punctual repayment of a loan or a credit card.
Collection data: Unpaid invoices that have been handed over to a collection agency.
Court data: So-called complex negative features, such as non-disclosure of the asset report, creditor satisfaction excluded, or creditor satisfaction not proven after one month.
Existing loan commitments/current loans/accounts.
Other data, such as your income, employer, marital status, or religion, are not used to calculate your credit score. However, it would help if you kept in mind that banks, for example, often use these factors separately when applying for a loan.
How do I get good credit again?
To become more creditworthy, you should heed these tips:
Check your credit report regularly and file an objection immediately if there are any errors. This self-disclosure shows you what data is stored about you.
Pay bills, installments, and other loans on time. That shows good payment practices.
Cancel accounts and credit cards you don't use. A high number of bank details also casts a bad light on you.
Conversely, it is well received if you show consistency with your checking account and have been using it for a long time. Check out this video https://youtu.be/Vn9ounAgG3w to find more recommendations on how to smarten up your score.
If you want to know which is the best credit score, keep in mind that the higher your credit rating, the more certain the bank can be of getting the money back. For you, this means that the higher your credit rating, the more likely you will get the loan you want. Moreover, the loan will be cheaper for you.
Conversely, the higher the probability of non-payment, i.e., the lower your solvency, the worse your credit rating. Then the bank will probably conclude that you are not creditworthy — and the loan will be rejected. Even an installment purchase, mobile phone, or rental contract can slip through your fingers.