If you’ve ever tried to take out a loan and found yourself rejected because of your credit rating, then you’ve probably also found yourself cursing the day that credit were ever conceived – and perhaps also wondering what good they could possibly serve. Here then we will look at credit ratings, what they actually are, and how you can work with yours rather than against it.
Credit is essentially any kind of loan – a credit card for instance is a card that allows yourself to give yourself small loans whenever you need them so that you can afford things on a day to day basis that you otherwise wouldn’t be able to – without needing to go begging to your bank. Of course car loans, mortgages and student loans all work in the same way. Now whenever a company hands out any kind of loan, that means that they are investing in you, just as someone might invest in stocks and shares. In other words, they are putting their money into you in the hope that you will improve financially and so be able to give them more money back as per your agreement. That means they’ve made a return on their investment and if that happens credit ratings improve.
However many times this won’t go to plan, and loans will be given to people that can’t pay them back. This then means that the company has essentially made a bad investment, just like buying poor stock that goes South rather than increasing in value. This means they don’t increase their investment and actually lose money instead. Thus the lenders such as banks and loan companies came up with credit ratings which would essentially allow them to identify good and bad investments so that they knew where to put their money. If you fail to pay back a loan for instance, then the lender will put a black mark on your credit rating so that others don’t lend you the money. The credit ratings are the credit companies protecting themselves by teaming up essentially.
Thus the most important way to improve credit ratings is to pay back loans. This means making your repayments on time, and it also means actually taking out loans in the first place so that you can demonstrate your ability to pay them back. Other things can also effect your credit ratings such as who you live with (and what their credit ratings are like) but still the most important aspect is your own ability to pay them back.
While credit ratings might seem like a huge burden, it is important to realize that they allow banks and lenders to provide loans with lower interest, and in some cases to provide loans at all so they do serve a purpose and can be on your side if you learn to control your own credit ratings.