What is a credit rating?
A credit rating is a tool (set of indicators) that helps creditors and service providers to assess the client’s ability and willingness to pay their financial obligations in a timely manner. With this With the help of this instrument, creditors want to get a better idea of the creditor’s credibility, cash flow and possible changes in solvency. The credit rating is used by both the international credit rating agency ( Standard & Poor’s, Moody’s, Fitch ) for assessing the creditworthiness of states, municipalities and large companies, as well as banks, insurance companies, landlords, employers, assessing potential co-operation with a particular individual or business.
In Europe, different credit rating methodologies have been in operation for over a hundred years, but in Latvia, the use of this tool is still in its infancy. Creditors and service providers in Latvia have traditionally paid much more attention to the information collected by the debtors’ registers on the individual’s late payers. These databases are maintained by private companies – credit bureaus and information about debtors can be posted or viewed by any merchant who has entered into a cooperation agreement with the particular credit bureau.
How is my credit rating formed and why is it important?
The assessment of the creditworthiness of private individuals is based on a number of factors and is ranked on a scale of 1 to 10 or even 1 to 1000. A higher credit rating means that the use of the service or purchase of goods will be more beneficial. The customer will be subject to a lower interest rate and / or commission and the overall terms of the contract will most often be more rewarding. It may also be important to apply for a loan that is granted for a shorter or longer repayment term.
Traditionally, 4 factors (in order of priority) are most affected by credit ratings:
- Payment History – Whether all payments are made on time. Have there been any late payments, if so, how long? Is debt recovery passed on to debtors or bailiffs? Is there an out-of-court settlement of debt, insolvency proceedings, movable or immovable property auction.
- credit liabilities – current types of loans (leasing, mortgage credit, credit cards, fast credit , consumer credit, study or student loan) and their total amount. How much are monthly payments, what is the term of payment of debts. The smaller the commitment, the better.
- credit usage history – how long are you using the loan (s). Long and timely credit discipline discipline is judged more positively than a loyal commitment over a couple of months.
- New Loans – When applying for an additional loan, the creditor evaluates how recently you have taken the last loan. If you’ve just taken a consumer credit or a credit card just now, and you want to take a mortgage, it can be seen as a risk-increasing factor.
Traditionally, the first 2 credit rating influences account for almost 70% of the total credit rating, but as we have mentioned in each country, another methodology is used and often focuses on credit history .
What additional factors may affect opportunities for collaboration or credit?
Credit rating is an important factor, but it is only part of a common formula that helps creditors make a decision. In addition to the credit rating in practice, lenders and other merchants may also consider many other factors:
- or have used consumer or sms credits in the last year
- For what purpose do you spend money and how much alcohol, entertainment and gambling deviate
- social benefits
- Relationship Status (Married / Single)
- number of children
- place of residence
- assets (provisions, movable and immovable property)
The assessment of all these factors is complicated and nowadays most creditors are entrusted with special computer programs for initial assessment. Upon receipt of a response, the credit specialist or the credit granting committee may make a decision based on past experience and other considerations you may have known. In everyday life, when it comes to credit history, most people actually talk about a credit rating that is much wider than the credit history.