A Guide to Credit Ratings

There are good reasons to establish a credit rating. Ratings or scores are three-digit numbers between 300 and 850. Higher ratings signal good credit habits, whereas a score below 650 indicates credit problems. But even if you know very little about credit ratings and factors that affect your score, you can educate yourself and build a high rating.

Importance

The importance of a good credit rating is apparent when applying for vehicle financing or buying a home. Everyone has three credit ratings because there are three credit bureaus. Lenders check all three ratings and use the average of your scores to determine if you can get a loan. Because ratings impact approvals and the rate you receive on a loan, it's vital to establish good credit habits. Some lenders set the credit minimum high, wherein you may need a score of 680 or higher to qualify for prime rates on loans.

Payments to Your Creditors

Credit scores are based on numerous factors, and payment history accounts for 35 percent of your personal credit rating. With that said, payment habits can either increase or decrease your rating. Regularly paying your bills on time every month and avoiding late payments will help your score.

Debts and Your Credit Rating

Never underestimate the impact of high debts. Credit ratings drop when you carry excessive credit card debt because the amount owed makes up 30 percent of scores. Signs of credit card debt problems include maxed-out accounts or accounts with balances greater than 30 percent of your credit limit. And if applying for a loan or another credit account, lenders will review your credit report and take note of high balances and likely reject your credit application. Pay down debt to fix a low credit rating.

Considerations

Together, payment history and debts account for 65 percent of your credit score. Factors that influence the remaining 35 percent of your score include length of credit history, credit applications and the mixture of accounts. Building a good rating involves more than paying on time and keeping debts low. Individuals with a long credit history usually have higher ratings; and someone who frequently applies for new lines of credit may have a lower score than someone who only applies for credit when necessary. Inquiries account for 10 percent of your score, whereas length of credit accounts for 15 percent of your score. Types of credit account for the remaining 10 percent of your score, and increasing your score calls for acquiring a mix of credit -- perhaps an auto loan, student loan and credit card.