Best tips for risk management


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How Important Is Credit Risk Ratio?

Every one knows how FICO or the Fair Isaacdividing your credit utilization over the
Corporation scoring systems work. There aretotal credit limits. For instance, if a
however many other types of systems employedperson has total credit limits of $80,000,
by lending companies when computing one'sand he used $60,000, then his debt to credit
credit worthiness. But whatever credit riskratio is 75%. An ideal percentage should fall
system your lender uses, it is important tobetween fifty to sixty percent. Making it
always keep a close eye on your credit riskabove sixty increases your chances of
ratio.becoming  a  credit  risky  borrower.
Credit risk ratio is the percentage or theThe third factor is the length of credit
likelihood that lenders will lose because ofhistory. This is fifteen percent of your
a borrower's inability to pay on time. Or, incredit score. Credit scorers like FICO are
other words, it is the odds that banks,not mindful of how long you have owed money
lending institutions, or credit cardfrom someone, but they are more interested in
companies will say "NO" to your credityour relationship with your lender. If you
applications.have used your credit and stayed with the
same credit card company for that long, that
A credit risk ratio is not a factor; rather,makes  you  more as a credit worthy borrower.
it is a result of your credit performance.
Just like what was mentioned earlier, theTen percent of the remaining twenty percent
FICO has its own way of scoring one's creditis based on the combination of credit types
worthiness or the ability to pay for hisyou use. Basically, there is the consumer
credit obligations. The mathematical formulafinance, revolving, an example is credit
is secret least likely disclosed, though FICOcard, and installment. If you vary your
reveals the factors that may spell differencecredit types, you have a big chance of
between being a credit worthy and creditreversing  your  credit  risk  ratio.
risky  borrower.
The other ten percent comes from your
The first factor is the promptness of yourresourcefulness. FICO awards a full ten
payment. That makes up thirty five percent ofpercent to borrowers who are confident to
your total FICO score. The earlier you paylook  around  for  the  best  interest rates.
the bills, the better. Also, you need to know
that FICO puts more focus on your recentInterestingly though, your FICO score will
bills, although your past late payments willnot guarantee you of having a complete credit
also reflect on your present report. Moreworthy status. Take for example, a person's
importantly, a credit card account that hascurrent employment or income status. Even if
been handed over to collecting agencies willhe has gained an attractive FICO score, but
definitely hurt your credit score. If you'represently has no means of earning income, he
not doing well in this 35-percent factor,will still be labeled a credit risk borrower.
then you are basically raising your creditThat person's credit applications will most
risk  ratio.probably still be denied. High credit risk
ratio is not something you would want to
The other factor is the debt to credit ratio.earn, so be extra watchful when you use your
This accounts for thirty percent of yourcredit cards.
total FICO score. This rating is obtained by



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