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How credit rating is determined

Credit ratings are determined differently in each country, but the factors are similar, and may include:

• Payment history - a record of delinquent payments, generally being more than 30 days, will lower the credit rating.

• Control of debt - Lenders want to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrower's after-tax income.

• Signs of responsibility and stability - Lenders perceive things such as longevity in the borrower's home and job (at least two years) as signs of stability.

• Re-Aging - Through re-aging, the date of last action on the account is changed. This can dramatically alter the credit score. In 2000, the Federal Financial Institutions Examination Council (FFEIC) clarified guidelines on re-aging accounts for delinquent borrowers.

• Utilization — Lenders ascribe increased risk to accounts with balances near their limits.

• Credit inquiries – An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. Inquiries that have no effect on the creditworthiness of a consumer (also known as "soft inquiries") are:
o Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.
o A creditor also checks its customers' credit files periodically.
o A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.
o A consumer can check his or her own credit report without impacting creditworthiness.

• Inquiries that do have an effect on the creditworthiness of a consumer (also known as "hard inquiries") are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries from lenders directly affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.

• Credit cards that are not used - Although it is believed that having too many credit cards can have an adverse effect on a credit score, closing these lines of credit will not necessarily improve your score. Many risk models consider the difference between the amount of credit a person has and the amount being used: closing one or more accounts will reduce your total available credit, lower the percentage of available credit, and possibly lower your credit score. Risk models also factor in account age: closing an account with several years of history that is in good standing will most likely negatively affect your score.

In the U.S. credit scores are broken down into 5 categories each contributing to a percentage of your credit score:

• 35% - Payment History
• 30% - Debt To Credit Limit Ratio
• 15% - Length Of Credit History
• 10% - Types Of Credit Accounts
• 10% - Inquiries (hard)



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