The term ‘credit rating’ refers to the system by which certain establishments evaluate the likelihood of an individual or business venture in obtaining a loan. Although it is common to think that credit rating and credit score mean the same thing, there is a distinction between these two terms.
An instance is given with the Equifax Credit Score. Credit scores are usually numerical values measured on a fixed scale that represents a recent account of your loan transaction.
What is the difference between a credit rating, credit score, and credit report?
It was earlier mentioned that a credit rating is a system that is used to ascertain the creditworthiness of individuals, companies, and other establishments. Credit ratings are usually given by a Credit Rating Agency (CRA).
We can also denote credit ratings in terms of a grade given to a country or its financial instruments. This grade usually falls between AAA and D.
On the other hand, a credit score is a number that either falls or rises with respect to the individual position as at the time of grading. You may come across someone who tells you that there is a universal credit score. There is no factual basis for a universal credit score.
What happens is that various lending firms and organizations ascribe a credit score to you based on the available information and their own system of scoring.
A credit report is a document that has every information that concerns your borrowing history. The information that you can get in a credit report include:
- Your bio including your residential address, your name, and your date of birth
- Credit searches
- Your loan history including the repayment details
- Information that can be accessed from the public records including the County Court Judgment register or Insolvency Register.
Why are credit ratings important?
It does not really matter what tool is used by a lender to judge how worthy an individual is to receive a loan, the major objective is to forecast the likelihood of repaying loans. Having loan repayment delivered early and a responsible expenditure of the loans collected will prove your ability to pay back loans in the future.
Credit ratings do not only influence whether your loans or overdraft application will be approved. It also covers mortgages, car loans, utility payments, obtaining credit cards, and purchase of phones on contracts.
What happens when you apply for credit?
A record of your previous application for a credit card or loan is always kept in a file. We usually refer to this as a “hard check” and making a lot of loan application within a short time will lower your overall credit rating.
Most times when we are in search of a lender who will approve a loan application in the shortest possible time, we end up applying to many lenders at a time. The result will be a couple of hard credit checks on your report. This will ultimately lower the odds of getting a deal that comes with the best rates.
Fortunately, there is a way by which you can bypass hard checks on your credit report and still see the credit cards or loans that you are qualified for.
How can you help improve your credit rating?
In order to obtain a good credit score, rating, or report, you need to show that you have borrowed loans in the past and repaid them on time. These tools and reports are used by various lenders in different ways. However, a good credit history is the result of previous loan repayments completed.
It is essential that your information in the records of these credit reference organizations are precise. For instance, you should remember to update your electoral register when you move to another residence. It may take some time before you are back on track with your credit records, especially when you have had issues with repayment of loans in the past.
However, if there is no record of applying for a loan, you will not have any evidence that will prove how creditworthy you are. In this scenario, it will be best for you to apply for the small loan amount and repay it in within the specified period.