Credit scores and credit risk- quite an intimidating subject for many. Dealing with banks on these topics aren’t much easier either. How banks determine your credit risk can become quite complex, but the more you know about your financial situation, and what key elements make up your score, the easier it becomes to improve your score and build good credit.
Do You Have Bad Credit?
It is essential to understand where you currently stand financially, and to do your homework before the bank does. Start by evaluating your consumer loan payments by assessing the number of late payments you have had in the last two years from any car loans, student loans, and credit cards.
Next, do the same by calculating any late mortgage or rent payments in the last two years. These payments can include mortgage, rent, equity line and second mortgage payments.
Since your credit score indicates whether you have a history of financial stability and responsible credit management, knowing and understanding your current situation is half the work.
How Banks Assess Your Credit Score
Although it may seem so, there is no complex or secret formula that generates your credit score. Payment history, indebted amount, length of credit history, and types of credit in use are the most important, yet evident factors that play a role in evaluating your credit rating.
Have you paid your bills on time? Have any of your accounts gone to collection? Have you declared any bankruptcies or foreclosures? These are common questions your bank will assess in order to understand your payment history.
This component of your score is typically the most significant, since it evaluates whether you can be trusted to repay your loan. If you have a consistent payment history, and pay your bills on time, you are more likely to have a good credit rating, and easily be approved for a loan.
Now say you don’t have a good payment history and are indebted a certain amount. How high is this amount, and how much of your total available credit have you used?
These considerations will be taken into account when your bank evaluates your credit risk. The higher your amount owed, the higher your credit risk. Naturally, with a higher credit risk, it becomes more difficult for banks to give you a loan, and in the case that they do, the interest rates will consequentially be higher than usual.
Finally, the length of your credit history may be incredibly helpful in the cases above. If you previously had consistent payment tendencies over a longer period of time, and have only recently been faced with financial issues, banks do take circumstantial events into consideration.
All in all, banks determine your credit risk by assessing your credit responsibly- manage your loans by making consistent and timely payments, and credit topics will never make you cringe again!