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The Credit Scoring System

By Sally Maison
Published: Wednesday, September 8th, 2010

The credit scoring system provides an analysis of your borrowing performance.  This is what lenders look at when deciding on the approval of any application you have submitted.  The higher you credit score is, the easier it is for you to be trusted by lending companies.  In determining how high a credit score will be, here is a list of things to keep in mind: 

Past Delinquency – past issues of delayed or no payments tend to impact scores significantly.  Lenders may think that if you have a past delinquency, it might happen again in the future.  There is a possibility that you will not be trusted enough to handle additional responsibilities.  The chances of getting your application approved will be slimmer.  That is why it is important to take care of balances, making sure that it is paid on time. 

Credit Use – a credit card owner who uses their card close to its credit limit may be considered to be a greater risk than those who does not max out on expenses.  Use your credit card wisely and you are assured of a better credit score.  Interest rates will go down while the credit limit of your card goes up.  Rewards are given to those who use their cards the right way.  Bad credit use may even deny you of getting your loans approved and might even get you turned down when applying for a job. 

Length of Credit History – People with a long history of credit tend to be more impressive in the eyes of lenders.  Someone who has been using their credit cards for years is less risky than someone with a newly opened account.  Lenders would also check the regularity of credit card use.  Inactive accounts would not fare well when it comes to credit scores.  It is advisable to use old credit cards every once in a while.  You can make small purchases with it to make it look active and enable the credit history to be refreshed. 

How often credit inquiries are made – credit card holders who frequently ask for credit limits or credit card applications in a short period of time may be assumed to be in a financial crisis.  This will make them look like a great risk.  A great number of credit requests may affect your credit score significantly. 

Credit Mixes – a person with one credit card only may be considered as a risk than that of s person who has a combination or a mix of different kinds of loans.  People who have installment loans score lower than those who have revolving loans.  An installment loan is borrowing a certain amount of money that should be paid in a given period of time.  The borrower is aware of how much each payment will be.  Revolving loans, on the other hand, is a set amount of money that can be borrowed as a whole or you can only borrow a small amount from it.  You can keep borrowing until the amount that has been set, as long as you also pay it back.  Those who have revolving loans get higher credit scores and are most likely to get lower interest rates.

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