Advantages & Disadvantages of Credit Rating

People with good credit tend to think that credit ratings are a good thing because their high financial status allows them to enjoy certain advantages. Those with low credit ratings often have an opposite view because they have trouble getting loans and usually get the worst terms on any type of account. You can enjoy the advantages and avoid the disadvantages if you know what goes into your credit rating and keep it high.

Definition

Your credit rating is determined based on the information that appears in your credit reports 1. They list your demographic information, including name, current and prior addresses, phone number and Social Security Number. They also contain your employment information, loans and credit card accounts. Any financial judgments such as liens will appear too. Creditors may review your credit reports or check your credit score, a three-digit number distilled by Fair Isaac Corpation from all the data 1.

Advantages

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The main advantage of a credit rating is being rewarded for managing your budget and finances responsibly. This qualifies you for the best credit card offers, including low interest rates and cards that give you gifts, points, airline miles or monetary rewards. You will get low interest rates on other types of loans, and your applications will be approved quickly. You will qualify for insurance at preferred rates, and a good credit rating makes you look more attractive to employers as well.

Disadvantages

Your credit rating can hurt you even more when you are already having financial problems. The rating will go down if you lose your job, have a medical emergency or fall behind in your bills for some other reason. This will keep you from getting credit at a time when you might desperately need it. Your credit rating can lock you into a subprime category. You will pay extremely high interest rates for any loans you manage to get because your rating marks you as a high-risk borrower. You may have trouble making on-time payments because the loan is so expensive, which keeps you from improving your rating and thereby locking you into a negative cycle.

Time Frame

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Most of the items that can affect your credit rating remain on your credit reports for seven years, the TransUnion credit bureau states 1. Certain bankruptcies can be reported for ten years, and debts owed to the government will stay on forever if they are never paid. Items remaining on the report for a time frame is an advantage for people with a good history because it shows they can maintain financial responsibility for the long term. It is a disadvantage for those who might have hit a temporary rough period. Skipped payments, repossessions and other problems during that time frame will affect the credit rating for seven years, even if you straighten things out after a year or two.

Warning

It is up to you to make sure your credit history is being reported correctly by the credit bureaus. Otherwise the advantages of your financial responsibility will be destroyed by erroneous negative items that pull your rating down. You may not even know they are there until you are turned down for credit or told by a lender that your rating is bad when you know it should be good. You can head this problem off by reviewing your credit reports regularly 1. The government lets you request one free copy from each bureau every 12 months through annualcreditreport.com, according to the Federal Trade Commission. There are three bureaus (TransUnion, Equifax and Experian), so you can cover the whole year if you get one every four months.