THE CREDIT GAME: PART 4
By Shafiq Jasar
CREDIT RATING AND CREDIT SCORES
Your credit rating and credit scores show to financial institutions how good or bad your finances are. Based on these rating and scores they decide whether to give you credit or a loan.
The most common method used for rating credit is the R system. Credit bureaus use numbers from “0” to “9” in combination with an “R”. Here, “R” means revolving credit. “R0” means there is no historic data to judge a person’s credit. The lower your “R” number the better your credit rating is. Here is the description of these numbers:
R0: Too new to rate; approved but not used.
R1: Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5: Account is at least 120 days overdue, but is not yet rated “9.”
R6: This rating does not exist.
R7: Making regular payments through a special arrangement to settle your debts.
R8: Repossession (voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy.
Remember, never neglect your regular and on time payment of your bills.
Credit bureaus have a scoring system through which they evaluate each individual’s credit worthiness. These scores vary between 300 and 900. Unlike the R rating, higher number means better credit. The higher your overall scores the better chance you have to borrow money from lending institutions and on more favourable terms. Almost all your financial transactions are constantly observed be the major credit bureaus. Equifax and Trans Union are the two largest ones that provide credit information to most banks and businesses. The following is a brief description of how your scores are calculated.
Your payment history makes 35% of your total credit scores. If you paid your bills on time in the past, this can give you up to 35% of your scores.
Your debt accounts for 30% of your total scores. If you have debts such as a mortgage or a car loan and handle it responsibly by paying your mortgage or loan payment on time, your scores can be higher. The reverse can affect it negatively.
LENGTH OF CREDIT HISTORY:
How long you have had credit accounts for 15% of your total credit. The credit bureaus look at history and length of your credit and want to see how have been handling the credit available to you.
TYPE OF CREDIT USED:
Credit bureaus look at the various kinds of credit you used and handled them. This counts for 10% of your total scores.
New credit is 10% of your total scores. The credit bureaus look at how frequently you acquire or enquire new credit. These enquiries can affect up to one tenth of your total scores.