The Advantages of Credit Rating Agencies

The major credit-rating agencies serve a vital function for American businesses and consumers. They assess risk in order to curb potential losses that can result from reckless lending practices. The major U.S. rating agencies for business are Moody's Investors Service, Standard & Poor's, Dun & Bradstreet, Fitch Ratings and A.M. Best. Banks rely upon TransUnion, Experian and Equifax in the consumer sector.

Assessing Risk

Banks must have an independent way to determine the creditworthiness of consumers before extending loans and issuing credit cards. The major consumer rating agencies fulfill this role. As for businesses, the same concept applies but with typically larger amounts at stake. Also, as corporations frequently issue bonds to a wide range of investors, the business rating agencies help to safeguard those investments.

Minimizing Loan and Bond Losses

The business and consumer credit rating agencies help to mitigate potentially disastrous losses that could shake the financial system. Banks are able to accurately measure possible losses through the credit scores of consumers. The agencies responsible for measuring them use sophisticated models to predict the likelihood of default. The business rating agencies help to measure the prospect of losses from loans and bonds using similar principles.

Providing Accountability

Our culture of consumption requires money to remain sated, and if those funds are not forthcoming by the traditional work ethic and weekly paycheck, credit has become widely available to pick up the slacks, shirts, televisions, computers, cars, et al. Excess credit can lead to problems with payback, and without the guiding hand of accountability provided by the major credit rating agencies, escalating problems could result.

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How Long Does a Credit Inquiry Affect a FICO Score?

A credit inquiry occurs when a creditor obtains your credit score when it checks your credit. Only credit inquiries that result from you applying for new credit, such as a new car loan, affect your FICO credit score. The FICO score is the most widely used credit score, calculated using the algorithm developed by the Fair Isaac Corporation.

Time Frame

According to the Fair Isaac Corporation, credit inquiries affect your credit score for one year. However, they appear on your credit report for two years.

Features

Certain inquiries may be treated differently than others. For example, if you apply for several mortgages at once, the credit scoring model counts the resulting inquiries as only one inquiry if all of the inquiries occur within a short period of time. This minimized the negative effects on your credit score.

Effects

Credit inquiries decrease your credit score, but not by much unless you have several inquiries in a short period of time. Your credit score falls because statistics show that people with more inquiries are more likely to declare bankruptcy, according to the Fair Isaac Corporation.

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How Will a Child's College Loans Affect a Parent's Credit Rating?

A parent may not think twice about co-signing a student loan to help his child finance a college education, but this could have significant consequences for the credit ratings of the child and the parent. On the other hand, this might help the child begin to build a credit history when he graduates. However, the parent should be prepared to repay the loan if he put his name on it.

Identification

A college loan only affects the parent's credit rating when one or both parents put their names on the promissory note, called co-signing. Once the parent co-signs the loan, the history on the account appears on the credit reports of anyone who signed the document. Often this is a necessary step with private lenders, because they typically require a score of at least 630 to approve a loan for a single borrower, according to the FinAid website. Federal loans almost always require the parent to co-sign the promissory note.

Benefit and Drawback

Co-signing a college loan boosts the parent's credit rating over time if the parent and child meet the agreed upon monthly payment for each billing period. The initial loan application and added debt burden of a student loan usually cause the borrower's scores to drop initially. However, this effect disappears once the account holders establish a good payment history, which may take up to six months. Any negative items, such as a missed payment, bring down the scores of the parent and child.

Considerations

Lenders consider more factors than the credit score when making future lending decisions for the parent. A person's monthly debt compared to his monthly earnings, called a debt-to-income ratio (DTI), carries as much weight as a credit score. The DTI shows the lender the parent's ability to pay a debt, while credit scores indicate his willingness to pay. According to the Moolamony website, most creditors require a DTI of no more than 36 percent, including the monthly payment for the potential loan. Some lenders may accept a DTI higher than 36 percent, however. The Federal Housing Administration, for instance, allows a DTI up to 41 percent, according to Real Estate ABC. Student loans can be for large sums -- sometimes hundreds of thousands of dollars -- which can cause the DTI to rise dramatically.

Tip

The child should seek a loan on his own before involving the parent. Federal loans require a co-signer, but not if the parents have bad credit. Private lenders often set aside a certain amount of loan money for college financial aid offices to let them award loans regardless of the borrower's credit score. If the parent must co-sign a loan, he may try to refinance it when the child is able to qualify for a loan on his own and take full responsibility for the debt. This is the only way to remove a co-signer from a promissory note.

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How Long Do Tax Liens Stay on Credit Reports?

An IRS tax lien can prevent a consumer from getting the financing and credit they need, and it can also mean that the IRS has access to your personal property. A tax lien may sound intimidating, but it is a simple legal process. As long as a consumer understands what a lien is and how to properly address it, then it can be removed from a credit report eventually.

Identification

A tax lien is the way that the IRS can use to collect back taxes that are due. When the IRS files a tax lien, they are able to have an influence over every aspect of your financial life including the ability to secure financing for large purchases such as a house or a car, or the ability to get more credit. Once the IRS is able to put a tax lien on your personal accounts, they can then use that lien to collect the back taxes that you owe.

Significance

The IRS can use a tax lien to seize your personal property to satisfy the back taxes owed. When a tax lien is authorized, the IRS does not need any further authorization to take any personal property that you own to satisfy a tax debt.

Time Frame

A tax lien remains on a credit report, and affects a credit score and the ability to apply for new forms of credit, for 15 years if it is not paid. A tax lien that is paid will remain on a credit report for 7 years after it has been paid. This 7-year period can cause the tax lien to remain on a credit report for more than the original 15 years, or less, depending on when it was paid. A tax lien that is paid after being on a credit report for 2 years will be on the credit report for a total of 9 years. A tax lien that is paid after being on a credit report for 12 years will remain on that report for a total of 19 years.

Considerations

The IRS has 30 days from the date of payment to release a tax lien. However, the IRS can sometimes let this time period lapse without performing the release, and it is the responsibility of the tax payer to follow up and make sure the task is done properly. The IRS offers a toll-free phone number where tax payers that are expecting line releases can call to confirm a lien has been released, or request that a lien that was supposed to be released be investigated.

Expert Insight

According to Credit.com, it is a good idea to obtain a copy of the lien release from the courthouse it was filed in and send a copy to each of the three credit reporting agencies. While the agencies will eventually pick up on the lien release in their normal course of research, it is a good idea to accelerate the process by providing copies of the lien release for the agencies to use in their records. The sooner a lien is off of a credit report, the sooner that consumer can get new credit or financing.

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How to Get a Very Good Credit Score

Getting a solid credit score is not difficult. It is simply a matter of responsibly handling your credit lines and faithfully paying your credit card bills. If you pursue this strategy and more, attaining a desirable credit score becomes just a matter of time.

Instructions

1

Obtain a copy of your credit report. You can get a free report annually from each of the three credit agencies (see Resources). Review each report, checking for any inaccurate or negative information as well as errors. Dispute any incorrect information in writing or online to Experian, TransUnion and Equifax.

2

Pay your monthly credit card bills on time and miss no payments. Pay at least the minimum balance. When you establish a record of reliability, it sends a very good message and increases your credit score.

3

Do not close long-held credit accounts in good standing. Having a longer credit history can score you points because it shows stability. Closing accounts can decrease your credit score because you are showing less available credit.

4

Do not open new credit card accounts you will use only infrequently, such as retail store accounts. Although the stores commonly offer 10 to 15 percent off present purchases, opening an account with them can negatively affect your credit score.

5

Avoid maxing out any cards. Keep credit used to about 30 to 33 percent of the limit. If it is already close to the limit, it is wise to pay as much as possible to get it reduced.

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Individual Credit Solutions

Improving your individual credit score helps you get financing without the assistance of a co-signer, who is someone with good credit who agrees to apply for a loan with you. Bad credit can result from delinquencies, excessive debt and other poor habits. But solutions can help fix credit problems and slowly increase your score.

Credit Delinquenices

A major key to solving personal credit problems is changing the way you manage your bills with creditors. Every late payment and every missed payment shaves points off your personal credit score. And if you continue to pay bills late or completely default on credit cards and loans, your score will drop and stop you from getting future financing. Managing credit and paying bills necessitates a measure of organization and good budgeting. Plan purchases in advance, and review how much you can afford to spend on extras such as a entertainment. Pay priority bills first, and if you have disposable income, spend this income in moderation and keep some for savings. If necessary, schedule automated bill payments to avoid lateness.

Lower Debt

Excessive spending can bring on high credit card balances, and carrying huge balances also hurts your individual credit score. Solve credit problems related to debt by using cash instead of credit, and resolving to keep your balances to a minimum -- less than 30 percent of your credit limit. Tips to help solve debt include paying more than your minimum, taking money from savings to completely eliminate the debt, and, if you use credit, paying off new charges every month.

New Account

Open new credit accounts with care, and don't send in several credit applications within a short period. Looking for the best rate on a car loan or mortgage loan are good reasons to shop around and contact multiple lenders; these inquiries don't affect credit scores as badly as applying for multiple credit cards (bureaus view shopping for loans as one inquiry). On the other hand, regularly applying for pre-approved credit cards or frequently submitting applications for store credit can take points off your score and stop efforts to increase your score.

Discuss Financial Problems

Creditors and lenders are here to help you. Rather than let financial problems or other issues affect your good standing with the company, contact your creditors and lenders for assistance if you can't make a payment because of unemployment or because you're taking time off from work to deal with an illness or injury. Mortgage companies offer loan modifications and forbearance options to eligible borrowers, and many other lenders permit skip-payment options to assist borrowers in distress.

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What Are the Benefits of a Good Credit Score?

Your credit history is shaped by a number of factors, such as how much of your available credit you use, whether you make payments on time and whether you've been through a bankruptcy or a foreclosure. Rather than analyze every wrinkle of your credit, lenders may look up your credit score, which combines all the details of your history into a single number.

Formula

The Fair Isaac Corporation developed the concept of credit scoring and the software and systems to do it, which is why your score is often called a "FICO" score. While FICO doesn't divulge its exact credit-score formula, it does identify the key elements of your score: 35 percent payment history, 30 percent the amount owed, 15 percent length of credit history, 10 percent new credit and 10 percent the type of credit used. The formula may be adjusted in certain situations, for example if you've only started using credit recently.

Benefits

Having a good credit score indicates you're a good credit risk. That means it's safer for lenders offer you more credit, such as a mortgage or a new credit card, at a low rate of interest. If you have excellent, credit and you qualify for Federal Housing Administration mortgage insurance, you may be able to buy a house with only a 3.5 percent down payment. Another advantage, FICO states, is that your score reflects your overall credit history: It averages good reports and bad rather than letting a few bad mistakes blacklist you.

Numbers

If you have a score above 760, Dana Wood says on the Real Estate News website, you're in very good shape: If you're mortgage shopping, for instance, you can expect multiple offers with good terms from lenders. If your score ranks below 620, you're considered sub-prime; you'll have higher interest rates and less room to negotiate. The range between 620 and 760 is the domain of the average borrower. You might think that higher is always better, but if you're already above 760, you're unlikely to get a better deal even if you push into the 800s.

Information

You can order a free report from each of the three main credit bureaus -- Equifax, Experian and TransUnion -- once a year from the Annual Credit Report website (see Resources). You can also obtain your credit score through the website, but you'll have to pay for it. The bureaus also offer their own proprietary scores to lenders, using their own systems, so it's possible that the credit score your lender orders won't be exactly the same as the one you get.

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