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A credit rating is an evaluation of the likelihood of a borrower to default on a loan.

Credit Bureaus and Credit Reporting Agencies provide credit information to creditors, such as banks and businesses, to help them decide whether to issue a loan or extend credit. This information may include your payment history, a list of current and past credit accounts and their balances, employment and personal information, and a history of past credit problems. People who make all their payments on time are considered good credit risks. People who are frequently delinquent in making their payments are considered bad credit risks. Defaulting on a loan can negatively impact your credit rating.

Contrary to what many people believe, there is no such thing as a credit rating or a "credit score" that says how much credit will be offered to you, or what financial products and services you are eligible for. Credit reference agencies such as Experian and Equifax only provide raw information, including:
  • How much you owe, and who you owe it to
  • The proportion of payments that you have been late on
  • The time you have lived at your present address, and whether you are a tenant or a homeowner
  • If you have been taken to court for late payment or default
The reason for this is that the retail financial services industry is sophisticated, and targets its products and services carefully. A credit provider will consider the market it is in and how closely your profile matches that of its ideal customer when making a decision whether or not to offer credit. What counts as a "good" credit rating therefore varies depending on who you are applying for credit from, and how they make their money, and how much risk they are willing to take. Each credit provider will use the raw information to create a "score" that is only meaningful within the context of their business.

For example, married homeowners with children are usually considered to have a "high" credit rating, and for a large secured loan, they are likely to be offered a low interest rate, because the risk of default is low (after all, it is secured on property). Also, with children in school, steady jobs and a mortgage to pay, there is a lower probability of financial irresponsibility, like going to Vegas for the weekend and blowing their life's savings. They will be offered a store card, because the store wants their weekly shop. A credit card offered to a newly employed graduate is likely to have a high interest rate, partly because there is a risk of default, but also because these individuals can be encouraged to spend a lot (whether on partying or furniture) and pay a small amount each month, leading to high profits from the high interest charges. The advertising for a credit card like this is likely to emphasise consumption, holidays, etc. An American Express charge card offered to a businessman has no preset spending limit, because he or she is claiming everything on expenses so there is minimal risk of default, and profit can be made from annual subscription and transaction fees paid by retailers.

This targeting leads to some interesting paradoxes. Paying your bills on time and in full will actually lower your desirability to most credit card companies, because without an annual fee, they will make little money from you. But it will make you more desirable to utilities, who consider late payers to be an inconvenience, not an opportunity. Applying for lots of credit over a short period of time is a black mark, because it hints at an impending financial disaster - but so does cancelling a lot of credit cards over a similar period.

In summary, if you have a history of defaulting, then you will not have a low credit rating per se, however every time your credit rating is calculated, it is likely to be low. If you have a history of paying everything on time and in full, then your credit rating may be high or low depending on who is calculating it! You can easily change your profile over a period of time by demonstrating a different behavior (i.e. get a card with a high interest rate and low credit limit, spend the entire limit and pay it off in full every month, pretty soon you will be offered a card or a loan with much lower interest and a higher limit, as the percieved risk of default diminishes, the better the credit you will be offered). Don't be tempted by anyone who says they can repair your credit rating overnight, because that's not how the system works!

Source: a brief spell working on mainframe software to do this

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