Credit Scores & Ratings

Credit scores and ratings refer to three-digit numbers that lenders and creditors use to assess creditworthiness. Scores and ratings range from 300 to 850, and countless factors play a role in your individual score. Understanding these factors will help you maintain a high rating and qualify for loans.

Purpose

Establishing credit and keeping a high rating and score helps you acquire loans from a mortgage lender, auto lender and other types of finance companies. Before lenders and creditors extend large funds and lines of credit, they assess your risk as an applicant. Having a good credit score -- the upper 600s and higher -- and no derogatory information on your credit file, such as a history of late payments, judgments, collections and bankruptcy, signal good credit habits. This helps you acquire easy financing and the most favorable interest rates on loans and lines of credit.

Consequences of Bad Scores

Bad credit can trigger a host of negative responses. Not only does a low credit score or rating disqualify you for some loans, but employers and insurance companies also review credit scores. Some companies will not consider applicants with a negative credit history and low score, and insurance companies may charge higher monthly premiums if you have a bad credit score.

What Determines Credit Scoring?

Knowing the various factors that impact credit scoring is key to maintaining a high score and rating. MyFico.com explains how different areas influence credit scoring. Payment history makes up 35 percent of scoring, while the amount you owe contributes 30 percent. Other factors that play a smaller role in credit scoring include the length of credit history at 15 percent, credit inquiries at 10 percent, and the types of credit accounts you manage at 10 percent.

Tips to Improve Credit Ratings

You can improve your credit scores and ratings by making wise credit choices. Start by paying all your bills on time each month. Reduce your balances on credit cards, or completely pay off balances. Keep credit card accounts open to maintain a long credit history. Don't apply for an excessive number of credit accounts. Each application for credit results in a credit check, and credit checks or inquiries can reduce your score. While you don't want to submit too many applications for credit, applying for one or two more credit accounts can help your score if you don't have a mixture of credit, or only manage one credit account. A good mixture can include a credit card and an installment loan.