The Importance of a Credit Rating

A credit rating is a measure of how much of a risk it would be to lend money to a person, business of other entity. Your credit rating directly affects your ability to borrow money. In addition, it may be used to determine your reliability as an employee or tenant.

Credit Scores

For individuals, your credit rating is summed up in a credit score, or FICO score. Scores range from 300 to 850; the better the credit rating, the higher the score.

Interest Rates

The better your credit rating, the lower the interest rate you're likely to pay on borrowed money---everything from a mortgage or a car loan to the rate on your credit cards. If your rating is bad enough, however, you may be denied credit entirely.

Background Checks

Employers and landlords often perform credit checks before hiring or renting to a person. A history of late or missed payments suggests that potential employee or tenant could be unreliable and create problems down the road.

Explanations

Credit reporting agencies allow you to include a letter in your file explaining negative entries in your credit history. Such letters won't improve your credit rating, but they may influence the way lenders look at that rating.

Other Entities

For companies and governments, credit ratings are summed up in a debt rating, which measures the risk on bonds issued by that entity. The scores range from D (in default) to AAA (the best), and the higher the rating, the lower the interest rate that the issuer has to pay to investors.