How Is a Credit Rating Determined?

Financial Memoir

A credit rating is the financial memoir that you began to pen the moment you created your first bill. Your story may have just started out, it may be mature, or it may have a sequel. But young or old, good or bad, it is uniquely yours. Just like a life story, some financial memoirs are more interesting than others. In order to determine if you have penned a financial work of art, your creditworthiness has to be assessed. A good judge and jury to do that would be to use the FICO system.

How You Rate

FICO, is the acronym for the Fair Isaac Company. Basically, it is a numbering system that can determine your creditworthiness. The FICO system was created in 1956 and it is used by the three major credit reporting agencies--Equifax, Experian, and TransUnion. The system works by assigning a point value to a series of questions that are answered from your credit rating. A FICO score can range anywhere from 350 to 850. The higher the score the better your story looks to lenders--and vice versa for a low FICO score.

Categories of Your Credit Rating

Even though your entire credit report is considered when a lender is trying to determine if credit will be extended to you, your FICO score carries the most weight. The score is divided into five major categories. Understand that 35 percent of your FICO score is represented by the way that you pay your bills, (now and in the past). 30 percent is your credit to debt ratio, meaning how much of your past credit do you still have available to you. For instance, if you have a credit card with a $1000 limit, but you still have $800 of available credit, you would have a 20 percent credit to debt ratio. (It is ideal to stay below 30 percent.) The third category accounts for 15 percent of your score and it represents how long you have had credit. The last two categories, both account for 10 percent. They are, the type of credit you use, and any new credit you may have acquired.

Improving Your Financial History

The difference between a financial memoir and a regular memoir is the that you can rewrite the financial one. If you have had some financial mishaps, and you do not like what you have penned for yourself, you can change your bad financial habits. Rewriting a bad credit rating will take some time, in the event of a bankruptcy, it can take up to seven years before lenders will take you seriously. But if you pay your bills on time and use credit responsibly, you will create a financial memoir that lenders will want to read.