What is the ability of credit and how it is calculated?

What is the creditworthiness and how it is calculated?

  

At the beginning of the definition:

Several firms have developed rating systems to determine an individual or company's credit worthiness. It is important for each person to keep track of their credit score because this is the main metric used by institutions when determining if the individual is worthy of a favorable rate.

Credit scores are based on your credit history and can generally only be changed over time. "Credit repair clinics" often claim they can remove negative information from your credit report for you, but beware - these claims can sometimes be false and may even be illegal. Here are some illustrations of the "dos" and "don'ts" of creditworthy behavior:

Do:

• If you have missed payments, get current and stay current.
• Pay off debt rather than shifting it to other accounts.
• Pay your bills on time. 
• Re-establish your credit history if you have had problems. 
• Keep balances low on credit cards and other revolving credit.
• Apply for and open new credit accounts only as needed.

Do Not:

• Close unused credit cards as a short-term strategy to try to raise your score
• Open a number of new credit cards, just to increase your available credit.
• If you have been managing credit for a short time, avoid opening a lot of new accounts too rapidly. Adding new accounts will lower your average account age, which could have a negative impact on your credit score, particularly if you are a new credit user.

To illustrate how credit scoring works, consider the following example that uses only three factors to determine whether someone is creditworthy. (Most systems have 6 to 15 factors.)

 EXAMPLE

Monthly Income  --  Points Awarded

Less than $400          0
$400 to $650            3
$651 to $800            7
$801 to $1,200         12
$1,200 +               15

Age

21-28                  11
28-35                   5
36-48                   2
48-61                  12
61 +                   15

Telephone in Home

Yes                    12
No                      0