Your "creditworthiness" is the single most important factor financial institutions look at when deciding whether to grant you a loan on the terms you requested. Your creditworthiness determines how much you can borrow, for how long you can borrow, and your interest rate. Your creditworthiness is derived from many factors such as your income, your credit history, your current debt load, and your repayment history. This information usually comes from your Credit Report.

Your creditworthiness determines how much you can borrow, for how long you can borrow, and your interest rate.

Credit Reports and Credit Scores

A Credit Report is a record of your credit payment history. Financial institutions use the Credit Report as a tool to help decide whether to grant you credit on the terms you requested. It is the best tool to determine your creditworthiness because it is comprehensive and objective.

What does a typical credit report include?

  • Your Credit Report includes specific information about each existing credit account such as the date opened, credit limit or loan amount, balance, monthly payment, and payment pattern during the past several years, bankruptcy records, information on tax liens and monetary judgments, and the names of those who have obtained a copy of your Credit Report.

  • All the credit reporting agencies maintain a credit score for you based on the information in your Credit Report. Financial institutions use this credit score to help make loan decisions and set your loan rates. The credit score is determined by analyzing repayment history across a broad spectrum of borrowers to predict the statistical likelihood that a borrower will make late payments, stop paying altogether, or declare bankruptcy. That likelihood translates into a numerical credit score, which is reported on your Credit Report. Credit scores can range from 300 to 850. The higher your credit score, the more likely it is you will be approved for credit at a great rate. Your credit score is calculated by the credit reporting agencies, not by financial institutions.

Credit score is dependant on the following five factors:

  • Payment History: A long history of making payments on time with no late payments will have the biggest impact on your credit score. The Payment History represents 35% of your total credit score.

  • Amounts Owed: The total amount you owe, and the amount you owe in relation to the total amount available, also significantly affects your credit score. The Amount Owed represents 30% of your total score.

  • Length of credit history: The credit score calculation factors in your oldest account and the average age of all accounts. The greater the length of your credit history, the better your credit score. This component represents 15% of your total credit score.

  • New credit: Opening several new credit accounts in a short period of time can LOWER your credit score. Multiple Credit Report inquiries can also represent a greater risk, but this does NOT include any requests made by you, an employer or by a lender who does so when sending you an unsolicited, "pre-approved" credit offer. To compensate for rate shopping, the credit reporting agencies count multiple inquiries in any 14-day period as one single inquiry. The frequency that you open new accounts represents 10% of your total credit score.

  • Types of credit in use: Your mix of credit cards, retail accounts, finance company loans and mortgage loans is considered in your credit score. The type of credit you have accounts for the final 10% of your total credit score.

How long does information remain on your Credit Report?

Most negative information on your Credit Report must be erased after seven years (although some bankruptcy filings can remain on your Credit Report for up to 10 years). That means information such as late payments, accounts that the creditor turned over to a collection agency and judgments filed against you in court, even if you later pay the account in full, stay with you for a long time!

If the information on your Credit Report is accurate, you cannot remove it before the seven (or ten) year period expires.

Positive information remains on your credit report indefinitely.

The Importance of Good Credit

Your Credit Report directly affects your ability to obtain a loan and the rate you will receive on that loan. It may also affect your ability to get a job. You can help yourself improve your credit by taking the following steps:

  • Pay your bills on time

  • Establish a steady work record

  • Open a checking account and always maintain enough money in that account to cover outstanding checks

  • Obtain a credit card and make timely payments to keep the balance low (or even pay the balance off in full every month)

  • Open new credit accounts only as needed

Once you start building good credit, it will be easier for you to obtain additional loans. Plus, you may be entitled to a better rate on your loan!

The Truth about Bankruptcy

If you are having financial difficulties, filing bankruptcy is usually not your best option. Bankruptcy does not give you a "clean slate" financially. It has several negative effects including:

  • When you file for bankruptcy it can stay on your Credit Report for up to ten years.

  • You'll have trouble getting credit. Creditors seldom extend credit to someone who files bankruptcy. If they do, the rates are often very, very high.

  • You'll have trouble getting any type of loan including a car loan, mortgage, credit cards, education, personal, etc.

Bankruptcy is not a "quick-fix" and should only be used as a last resort.