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Credit Score: The Importance Of Creditworthiness

Business Success

 

Whether you want to apply for a personal or business loan, having a good credit score is of crucial importance. The credit score is determined based on your credit history and it reflects your ability to pay all debts in a timely manner.

The credit score is usually used by creditors, banks, and lending companies to determine the creditworthiness.

 

What Is Credit History?

Credit history, as it name says, is the history of all your credits and payments and it illustrates your ability to repay all debts on time. Specifically, the credit history is used to determine your credit score, a value analyzed by financial institutions to predict future insolvency.

The credit score is particularly important for lenders who, before granting a loan, will look at the past payments made by the applicant.

The easiest way to build personal or business credit history is with a credit card. In the lack of it, some financial institutions will consider payments of past microloans, bills, and even rent or mortgages.

Factors That Influence Your Credit Score

  1. Credit History

Your payout history affects as much as 35% of your credit score. The goal is to make all payments in due time and, as mentioned above, most lenders are interested in debts made with a credit card.

  1. Credit History Length

The length of your credit history accounts for 15% of your credit score. A major number of payments made on time is seen as more reliable by lenders and a short credit history might have a negative impact on your loan application.

  1. Current Debts

The current debts have an impact of 30% on your credit score. Not all debts are negative but if they exceed a certain limit lenders might refuse to grant the loan.

  1. New Credits

Especially in the case of businesses, recent purchases account for 10% of your credit score. However, you should avoid opening new accounts as this procedure is often suspicious.

  1. Types of Credit

The types of credit considered account for another 10% of your credit score. It is advisable to use different types of credits when building the credit history, such as credit cards, reported rent payments and even automatic bill payments.

How To Build Credit History

As an individual, you can build a credit history by:

  • Making payments on time;
  • Using your credit card without spending money you don’t have;
  • Keeping your bank account open for a long time.

In the case of a business, you can build a credit history by:

  • Keeping your information updated to all three credit bureaus;
  • Make early or on time payments to your creditors;
  • Establish trade line with suppliers.

How To Determine Your Credit Score

The credit score is calculated by a software that takes into account a number of variables to which is attributed a positive or negative rating. The points of a credit score can vary between 300 and 850 and the value attributed to each element vary according to the policy of each financial institution. This is why some banks might grant a loan while others might reject it.

In the case of individuals, the final result is obtained by screening the family situation and income ratio, age, type of employment, credit reputation, residency, salary accreditation, and existing debt exposure.

In case of businesses, credit score is determined based on publicly accessible data and on information gathered from vendors, credit card companies, current account providers and other credit traders.

All points gathered are added to the final value and the outcome may be:

  • Subject to risk
  • At limit
  • Actionable

Credit information is collected by credit report agencies and you are entitled to order a free credit report from each major agency through annualcreditreport.com.

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