What Do Companies Look for in a Credit Rating?

Your credit rating is dependent on the information in your Equifax, TransUnion and Experian credit reports. This trio of consumer credit reporting agencies gathers information about your employment, living arrangements, loans and accounts and makes it available to lenders, insurers and employers. These companies want to know if you are likely to pay back loans, to be a good insurance risk or to be a reliable employee. They look for certain things in your credit rating to get the answer.

Function

Your credit rating functions as a quick snapshot of your financial solvency. FICO, a major financial company, uses your credit reports to calculate a three-digit number known as your credit score. It tells lenders, insurers and employers whether you are financially stable or are having trouble handling your commitments. Those companies may make their decision based on your score, or they may review at least one of your detailed credit reports to determine your credit rating.

Factors

Companies look at various factors to come up with your credit rating. They are all related to your overall stability and financial health. Your rating is better if you have owned your own home and maintained steady employment for several years. High income also counts favorably. Lenders, insurers and employers want to see responsible use of credit, which means paying your bills promptly every month and not using all your available credit lines. They also like to see a variety of accounts, including credit cards and other revolving lines and fixed-term loans like mortgages and automotive loans. Your credit rating will be higher if you have been using credit for a long time because you've had more time to establish a history.

Effects

Companies may deny your insurance or employment application or refuse to open an account for you or refinance a loan if your credit rating is bad. You will not be able to get a house, car or credit card. This limits your financial prospects and can harm your rating even further, since credit applications are recorded on your reports. Your employment history will be negatively impacted if your bad credit prevents you from getting a good job.

Solution

You can improve your credit rating by focusing on the same things that FICO considers most strongly when coming up with your credit score. The single most important influence on your rating is whether you pay your bills on time or have delinquencies. You will also look better to companies if you pay down your highest balances. Don't apply for new loans and accounts unless they are essential, as too many inquiries will put a blemish on your credit reports.

Warning

Credit report inaccuracies can unfairly hurt your credit rating, and the Florida Public Interest Research Group warns that 70 percent of reports have some sort of mistake. Lenders, insurers and employers are all required to tell you which credit report they reviewed and why they turned you down, according to the Fair Credit Reporting Act. Their denial letter must also give instructions for getting a free copy for yourself so you can scrutinize it for errors. Dispute any you find with the relevant credit reporting agency, which will have a form for doing so on its website. It must send a corrected credit report copy to the company, and you can ask that your application be reconsidered because the original decision was based on false information.