A credit rating, or score, is a three-digit number that is basically a grading system that gives creditors a quick snapshot of your credit report and insight as to how you pay your bills and manage your credit. A low score can cost you extra money in interest over the life of a loan or, if you have a really low score, can prevent you from getting credit at all.
Credit Score Calculations
A credit score is also known as a FICO score, which stands for Fair Isaac Corp., the company that developed the system. FICO scores range between 300 and 800. The exact formula for determining one's FICO score remains a secret but Fair Isaac has identified five areas that impact a FICO score: payment history (35 percent), amounts owned (30 percent), length of credit history (15 percent), new credit (10 percent) and types of credit used (10 percent). An "excellent" credit rating is a FICO score between 760 and 850, while a "very good" rating is a score between 700 and 759. The average FICO score is 687, which is calculated by adding up all scores and dividing them by the number of people.
Raising Your Score
If your FICO score isn't "excellent" there are some ways you can improve your score. Some tips include paying your bills on time, refrain from applying for new credit as multiple credit applications can hurt your score, keep open old accounts as having long-term credit can help your score and monitor your credit report for any errors.
Mortgages
The type of loan a person is seeking sometimes gauges credit worthiness. For example, a mortgage company could give more weight to different factors compared with a credit card company. According to Freddie Mac, credit scores ranging from 770 to 850 are considered "very good" and mortgage borrowers within this range usually get the best credit rates.
Auto Lenders
An auto loan lender might take into consideration how much a customer is putting down, as well as how long a person has been at one job and their debt-to-income ratio. In addition, past performance on similar type loans is also considered. So, if a person missed a car payment in years past, that might be more important than an overdue credit card bill.
Credit Cards
Credit card companies may place a greater emphasis on credit card information, such as if a person missed any revolving credit payments. In addition, the system will usually evaluate a student seeking a starter credit card differently than a platinum cardholder, for example.
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