Financial Credit Rating

Every financial move you make that involves debt is tracked and reported to the credit bureaus. That information is combined to create a number, known as your credit rating or score. Your financial credit rating is a valuable tool when you seek loans or other financial products, so you need to understand how it works and take steps to protect it throughout your life.

The Importance of Credit Scores

When you apply for any type of debt, including a mortgage, loan or credit card, your potential lender will look at your credit score. The higher it is, the better the chances will be that you will be approved, and the more favorable your rates and terms will be. Potential landlords may also look at your credit score to decide if you are an acceptable risk as a lessee. It can even affect your ability to get a job, as employers who are looking for someone responsible can check your credit rating to see how financially responsible you are.

FICO Scores

There is more than one type of credit score out there, but most lenders look at the Fair Isaac Corporation score, or the FICO rating. This is figured by three national credit reporting agencies: TransUnion, Equifax and Experian. Each figures a different FICO score for you based upon information they are given from your creditors. The scores range from 300 to 850, with the average American having a score somewhere in the 600s or 700s. In general, lenders want to see a score above 700. Scores below 600 will create problems because they will be considered too risky by many lenders.

How They Are Figured

The actual formulas that are used to figure your credit rating can be quite complex, but they include many aspects of your financial history. Your payment history for your credit accounts is the largest part of the score, making up approximately 35 percent of the score. The amount you owe compared to the amount of credit you have available comprises approximately 30 percent of your score. The length of your credit history contributes an additional 15 percent of your score, while any new credit accounts you have opened and other factors, like the mix of credit types on your history, make up 10 percent respectively.

Maintaining a Good Score

If you are curious about your credit score, you can purchase a copy from one of the three credit reporting agencies to see your current score, or you can request to see it from a lender you have applied for a loan through. If your score is good, maintain it by staying current on all of your bills. Avoid increasing your debt load to the point where the amount of debt is close to the credit limit on any account. Seek new loans with caution, as each inquiry has an impact on your score.

Fixing Credit

If your credit is low and you wish to improve it, start by paying your bills on time every month. Pay down debts that are close to their credit limit. If you have any errors on your credit history, have them removed. Sometimes your credit will be low because you have a short credit history. To fix this, get a simple credit card and use it monthly, paying off the balance on time each month. Over time you will improve your score.