Credit Rating

"Credit Rating" submitted by SchoolGrantsfor Editorial Team and last updated on Sunday 8th January 2012

Table of Contents

A credit rating is an evaluation of the likelihood of a borrower to default on a loan. Credit bureaus and credit reporting agencies provide this information to banks and businesses to help them decide whether to issue a loan or extend credit. Your credit rating may include your payment history, a list of current and past credit accounts and their balances, employment and personal information and a history of past credit problems. People who make all their payments on time are considered good credit risks. People who are frequently delinquent in making their payments are considered bad credit risks. Defaulting on a loan can hurt your credit rating.

Credit Report is a compilation of information about a consumer’s borrowing history, your borrowing habits and money-managing skills including payments on revolving credit accounts and outstanding balances on existing accounts. Provides lenders with information that helps determine any risk involved in giving a potential borrower credit or a loan. A person with a good credit report is likely to get a better interest rate than someone with a poor credit report.

Credit Score/Rating is A judgment of someone's ability to repay debts, based on current and projected income and history of payment of past debts. Sometimes expressed as a number.

If you default on your loan: the loan's guarantor must report your loan as a “collection account.” Once the loan is paid in full, the guarantor updates the reporting to “paid collection account.” Be aware that each default is reported twice—once by your lender and once by the loan's guarantor. If you rehabilitate your loan: a lender will repurchase it and remove it from default. And your guarantor will remove derogatory credit remarks from your credit report. Outdated information: Credit bureaus can remove information after it becomes outdated. If the initial negative report is more than seven years old, your guarantor will delete it. Removal of a negative report does not change your obligation to repay your loan.

Private loans are usually based on your credit rating and income-to-debt ratio—not financial need—and may require a co-signer. The information in your credit report will determine the interest rates you qualify for. A record of your integrity regarding matters of borrowing and purchasing. Used by lenders to help judge whether they can trust you to pay them back.

Let your lender know if you can’t make your payments. If you fall behind, your delinquency will likely be reported to a national credit reporting agency, which could damage your credit rating, making it harder and more expensive if you want to get a loan for a car, home or other major purchase. Ask your lender about changing your repayment plan, or consolidating or combining your loans. You can also look into a deferment or a forbearance to temporarily postpone, reduce or extend your payments.

If you don’t repay your student loan on time or according to the terms in your promissory note, you could default* on this legal obligation, which has serious consequences and will adversely affect your credit rating. If you fall behind, your delinquency will likely be reported to a national credit reporting agency, which could damage your credit rating, making it harder and more expensive if you want to get a loan for a car, home or other major purchase. For the FFEL and Direct Loan programs, default is more specific—it occurs if you fail to make a payment for 270 days if you repay monthly (or 330 days if your payments are due less frequently). The consequences of default are severe. Your school, the lender or agency that holds your loan, the state and the federal government may all take action to recover the money, including notifying national credit bureaus of your default. This may affect your credit rating for as long as seven years.

Credit Bureaus / Credit Reporting Agencies

These agencies maintain your credit history, which reflects how well you repay your student loans, credit cards, car loans or any other credit you may have. Based on your performance, you are given a score that provides future creditors with information on whether or not you are considered a credit risk. Credit Bureaus company collects and sells information about how people handle credit. It issues credit reports that list how individuals manage their debts and make payments. The three major national credit bureaus are Equifax, Experian (formerly TRW) and Trans Union.

Free Credit Report

To manage your finances well, you need to understand the concept of having good credit and using it wisely. Your credit report—a listing of all your credit accounts and your payment history, details on where you live and work, and whether you’ve been sued or filed for bankruptcy—is a logical starting point.

Your credit history plays a big part in your future, because it is checked whenever you want to rent an apartment, buy a vehicle or apply for certain types of employment. Failure to pay back your student loan promptly can result in a poor credit rating.

Curious about what’s on your credit report? Find out by visiting, http://www.ftc.gov/. All consumers are entitled to one free credit report from each of the three major credit reporting agencies annually (Equifax, Experian and TransUnion). You can order all three reports at one time, or you can order a report from a different credit reporting agency once every four months. Review your credit report to ensure the data is accurate. If you find erroneous data on your report, visit the credit reporting agency’s Web site to learn more about disputing errors.

By reviewing your credit report you’ll see what future lenders see. If you find late payments or other negative marks, you may be living beyond your means. Take a little time to make a budget. You can improve your credit by making on-time payments reducing your overall debt and resolving issues with your creditors. Despite prevailing practice in America, carrying a lot of credit card debt just doesn’t make sense. Credit cards typically feature high interest rates, a short grace period and cash advance fees. They often lead to impulse purchases and emotional spending— both of which can cause your debt to spiral out of control. What’s more, if your financial situation requires you to make only minimum monthly payments, it can take a long time to pay off the principal.

Identity thieves may steal your personal information and ruin your credit. These thieves often run up thousands of dollars in credit card debt, just to name one problem, and the bills are sent to you for payment. Your credit rating can be ruined. Even though it’s not your fault, you’re the one who has to clean up the damage, which can take months or even years.

To receive a free credit report annually, you can: visit www.annualcreditreport.com; call 877.322.8228, toll-free; or mail a request to Annual Credit Report Request Service, P.O. Box 105283, Atlanta, GA 30348-5283. Look for unfamiliar accounts and incorrect addresses—signs of identity theft. Also see our Free Credit Report FAQ, Tax Incentives for Education, Federal Taxation of financial aid for students

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