Credit scoring is a score calculated according to numerous rules and criteria related to credit history. The higher the score, the more likely it is to be approved when applying for a loan, although even a high score is not a guarantee, since the decision is made by the lender. You can also visit derogatory marks for credit reports.
The value of the credit rating (scoring) is influenced by the presence, duration and amount of loan delinquencies, types, number and amount of active and repaid loans, and other factors. Let’s take a look at factors that can affect your credit score.
The main factors influencing the credit rating (scoring):
Delays
One of the most important parameters of a credit rating (scoring) is the presence of delays in credit history. Delay – skipping the next loan payment. Delay is characterised by the following parameters:
- the duration of the delay – delays are divided by duration as follows: up to 6, from 6 to 30, from 31 to 60, from 61 to 90, over 90 days, etc.;
- amount of delay.
There are two types of delays:
Closed delay – the payment was made with a delay, but it was nevertheless made;
-Current overdue debt – payment was not made in full and at the current time the borrower is not performing obligations to the lender.
A delay of up to 6 days can be considered by creditors as technical, which was admitted as a result of some kind of misunderstanding. At the same time, long-term delays, for example, more than 90 days, are viewed negatively by most banks, although alternative finance organisations can provide loans to such consumers. Such behaviour of the borrower indicates the occurrence of any difficulties that he is unable to solve for the full and timely fulfilment of his obligations to creditors. Exceptions for long delays can be a long delay of a small amount, for example, a few dollars. This situation is more likely to be associated with an error and can hardly be regarded as malicious intent of the borrower.
Associated with delays is such a factor as systematic delays – multiple delinquencies in one or more loans. The systemic nature of delays indicates the absence of a responsible attitude of the borrower to his obligations or the frequency of his various difficulties. The number of delinquencies required for recognition of a systemic nature depends on several factors: the number of loans the borrower has, the period of time during which delinquencies are allowed.
Loans
Of great importance on the credit rating (scoring) are loans, information about which is in the borrower’s credit history.
Loans are characterised by:
-type (consumer, credit card, car, mortgage, etc.);
-the amount;
-activity status (active, closed, sold to collectors, refinanced, etc.).
So, borrowers who have loans available only for large amounts, a mortgage, car loan or a large business loan are more serious for lenders. When a borrower has a large number of loans for small amounts, this may indicate the impossibility of accumulating even a small amount of money. It is important to note that the “size” of loans differs from region to region.
The activity status shows whether the borrower is currently repaying the loan or not. And if he does not pay, then why did he stop – he successfully repaid, refinanced, did not repay, as a result of which the creditor sold the debt to the collector or wrote it off as a bad debt. All this certainly affects the credit rating (scoring).
Delays and loans are not the only factors that affect a credit rating (scoring), but are the most important.
Combination
It is important to note that the factors affect the score collectively.
So, one factor in combination with another can have one effect, and in conjunction with the third, a completely different effect. For example, the credit rating (scoring) of a borrower who is delinquent for the first time may decrease more than that of a borrower who systematically delays and, conversely, a borrower who is systematically delinquent, i.e. delays in the payment of each loan, may not notice the change in the credit rating (scoring) when the next delay appears.
Thus, according to the borrower’s credit history, a lot can be said about a person, his behaviour and life situation. That is why credit history is called a financial dossier. The credit rating (scoring) helps the borrower understand how the lender will look at him if, to make a decision, he only checks the credit history, without taking into account income, work and other factors.
Conclusion
After obtaining a credit history and credit rating (scoring), the borrower can assess their chances of getting a loan. If your credit rating is low, it may be because you did not have loans or were overdue. Good payment discipline and timely payment of loan payments always have a positive effect on the credit rating, increasing it, and when applying for a loan, there will be high chances of a positive decision.
