A credit rating, also called a credit or FICO score, is a three-digit number that organizations use to determine a person's creditworthiness. This number, which can range from 300 (extremely bad) to 850 (perfect), can determine whether you can receive credit such as auto loans, mortgages or credit cards, and can even impact your chances of getting hired for a job. Having a negative credit history will lower your credit score.
How Financial History Affects Credit Score
The credit scoring algorithm uses several factors about a person's credit history to determine their credit ratings, including length of credit history, payment history, types of accounts and new credit. A person with a lengthy credit history, a diverse mix of credit types, including revolving credit, loans and credit card and a timely payment history will have a good credit score, while someone with a short credit history or a record of late payments, delinquent debt and high credit card balances will have a poor credit score.
Lifespan of Negative Credit History
Negative credit items, such as late payments, charged-off accounts and debt collections will typically remain on a person's credit record for seven years (although some may drop off earlier), regardless of whether or not the individual pays off the debts. Home foreclosures and judgments remain on someone's credit report for seven years while bankruptcies typically mar a person's credit history for 10 years. Although these accounts remain on a person's record for years, their effects on her credit score lessen over time.
Consequences of Low Credit Score
People with low credit scores can find obtaining any kind of credit a daunting task. Credit card companies, mortgage lenders, bank loan departments and auto loan firms all frequently deny credit to individuals with low credit scores. Cable and cellular phone companies often run credit checks on new customers, and may decline service to people without satisfactory credit histories. Additionally, having a poor FICO score can lessen a person's chance of obtaining a job or a rental dwelling, as employers and rental agencies frequently run credit checks.
Tips to Repair Credit Score
Having a good credit score is crucial to an individual's financial success. A person with bad credit can improve his FICO score by obtaining a secured credit card that reports to the major credit bureaus every month and using it to make small purchases, paying off the balance once per month, says MSN Money, a personal finance advisory website. Another way a person can fix his credit score is by paying down balances on existing credit cards.
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