Credit Rating
The Credit Rating Method – How it Works
The credit rating method used by 90% of lenders is the Fair Isaac Corporation method, commonly referred to as the FICO method. Credit scores using this method range from 300 to 850, with the higher scores being the better scores. FICO reports that the median credit score in America is 723.
FICO scores are determined based on five categories of information contained in your credit reports.
Your Payment Record – 35%
The most important factor in the credit rating method is your payment record. A full 35% of your credit score is based on how well and how timely you make your payments. Included in this category are late pays, collections, charge offs, and bankruptcies. The more current any derogatory information in your file is, the worse lenders view it. Even the worst things that affect your credit get better with age.
Outstanding Debt – 30%
The next biggest factor in the credit rating method, is how much debt you are carrying. Credit card debt is particularly scrutinized because cards are the easiest to get in trouble with. If you have one or two cards that are “maxed out”, your credit scores will probably be much lower. Better to spread your balances over a few cards than to max any of them out. If possible, keep balances on all your cards at 30% of the high limit or less.
Length of Credit History – 15%
The longer you have had credit established, the more favorably you are viewed by lenders. A long credit history gives a lender more information in which to gauge your future actions.
Inquires – 10%
Inquires account for 10% of the credit rating method, and is probably the least understood. Each time you apply for credit, insurance, a rental, or employment, there is a good chance a credit report will be pulled. This is called a hard inquiry, and is recorded in your credit report. Lenders look hard at these inquires, especially if they have occurred in the last six months.
Lenders won’t get too concerned if you have no more than 10 hard inquiries in your credit report, spread out over several months. But if you suddenly have 8 to 10 inquires in a short period of time, they tend to get nervous. The exception to this is when several inquires show up that indicate you are shopping for a particular type of loan, such as an auto loan or a mortgage. It should be obvious that you are only looking for one such loan. Inquires can stay on your credit report for 2 to 3 years.
Lenders often times pull a mini version of your credit report for a promotional offer. These are called a soft inquiry and are not reported. Likewise, when you request a copy of your own credit report, that also is called an inquiry but it does not show on your credit report either.
Different Types of Credit You Have – 10%
A credit file containing a mortgage, auto loan, bank loan, and two or three credit cards tells lenders that you have the capability of managing different kinds of debt. This variety of debt will add to your credit score. If your credit history only shows a few credit cards, even though your payment history was perfect on them, your scores will be less.
Understanding how the credit rating method works should help you manage your credit scores better. With proper management, you could easily be at the median credit score of 723 or better.
How Bad Credit Affects Your Employment
Many employers decide to hire or fire employees based on their credit ratings. People who have bad credit rating usually are not hired. There are many risks involved in hiring an employee with a bad credit rating, because poor credit rating shows financial insecurity, and hence employers due to high security risk do not hire such employees.
There is a law, which prohibits employers to deny jobs to bankrupt people. They reject promotions of employees for bankruptcy reasons. Therefore, employers refuse to give jobs to such defaulters. Most organizations conduct credit check regularly. Government workers and new employees are checked for bad credit rating frequently.
Reasons For Increased Credit Check:
Credit checks are increasing and some employers are interested in certain other kinds of credit checks such as background verification and criminal histories. Some of the employers are not worried about bad credit rating, if they find the candidate suitable enough for the job.
Credit has not turned out to be the best factor to judge accountability of employees in the workplace. People who bluff in their job applications and hide their identity, and even faked about their education and experience were more likely to lose jobs.
Credit report is the best way to verify employees. It is a way to double check the authenticity of the job applicant. Many companies even crosscheck their social security numbers. Lenders check for bad credit rating before giving a loan or a credit card to a person.
People involved in jobs such as account clearance and security clearances are denied for promotion, if they are caught with bad credit rating. Some recruiters give employees a chance to clear their credit ratings within a speculated period for promotion purposes.
Individuals, who deal with cash, jewels and valuables are often checked for credit rating for security purposes. Jewelry manufacturers often do credit checks of their employees, who deal with diamonds and gems.
Things An Employee Need To Know About Credit Check:
Employee permission is necessary for credit check. Employers have to take a written permission from their employees stating consent for the credit checks. An employee denying permission on the same stands to lose his/her job. It is a law that an employer has a right to conduct a credit check, when required.
The law also states that bankruptcy cannot be stated simply the reason for denial of jobs. If an employer refuses you a job citing bankruptcy reasons, you have full authority to consult an attorney.
Jobs denied due to bad credit rating makes it mandatory for the employer to inform the employee the reason as bad credit rating. Employer also has to provide the employee with information such as a copy of the credit report, the resource that provided the credit report and a copy of the Federal Rights Act, which explains the same.
Hence, employees need to check their credit ratings carefully, before appearing for an interview. Unfortunately, bad credit rating leads to a poor judgment by the employers many a times.