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Banks, credit card companies and other lenders using the credit rating of a consumer to evaluate the risk of lending money to the consumer and to reduces losses due to bad debts. The credit score is a 3 digit number derived from the credit report of an individual.  It  is also used to determine if  the consumer is eligible for a loan and the amount and interest rate of the loan. So having a good credit rating, helps a consumer get a loan or credit at better rates and for larger amounts.

Though the exact formula for calculating credit scores differs according to the credit rating agency, the major factors are as follows:

1. Punctuality while making payments (about 35%) - all payments should be made before the due date as far as  possible. If the debt has been turned to a debt collector, it will adversely affect the credit rating.

 

2.  Amount of debt a person has (30%) - the ratio of  the debt a person currently has to the total credit limit is considered. Lower the credit card usage, the better the credit score, so it is advisable to pay in cash as far as possible.

 

3. Length of credit history (15%) - the longer the credit history the better. Many individuals get a credit card while in college or even younger to improve their credit score.

 

4.  Type of credit used (10%) - installment, revolving, consumer finance has been for  financing credit , using low cost credit improves the rating

 

5. Amount of credit obtained recently  and recent searches for credit (10%) - A person with a poor credit rating is likely to spend more time searching for loans, and this will further degrade the credit rating.

 


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