Your credit rating score, or your FICO score, is a three-digit number that rates how responsible you are with credit. It is called a FICO score, because the scoring formula was created by a company called the Fair Isaac Corporation. Your FICO score uses a complex formula to analyze information contained in your credit reports kept by the three major credit bureaus: Equifax, Experian and TransUnion.
What is a Credit Rating Used For
Your credit score is used to determine your creditworthiness. Each time you apply for a loan---whether it is a new credit card, a mortgage loan or a car loan---the company will look at your credit rating. If your credit rating is too low, you may be denied credit. If you have a high credit rating, you will receive a higher credit line (be allowed to borrow more money) and/or have a lower interest rate (be charged less to borrow the money). Credit scores/ratings range from 300 to 800. According to Whats my Score, the majority of Americans have scores in the 600s or 700s.
How is My Credit Score Determined
35 percent of your credit rating is determined by your payment history and how responsible you have been about paying your credit. 30 percent of your credit rating is determined based on how much you owe, and how you have distributed that borrowing. 15 percent of your credit rating is based on the length of your credit history, and how long you have had credit. 10 percent of your credit rating is based on how much new credit you apply for. The final 10 percent of your score is based upon the different types of credit you use.
Credit Scores and Payment History
If you pay your pills late, your credit rating will be low. Your payment history makes up 35 percent of your credit score. Payments 30 days late, 60 days late or 90 days late are reported to the credit reporting agencies and used to determine your credit score. If you have a bankruptcy or have a home foreclosed on, this lowers your credit score and stays on your credit report for 10 years. If you have a short sale or settle a debt for less than what you owe, this also lowers your credit score (although not as much as a bankruptcy or foreclosure).
Borrowing Money and Credit Scores
You have to borrow money in order to have a credit score, because if you never borrow money, creditors have no way of knowing how responsible you will be at paying it back. However, creditors also do not want you to borrow too much money, because that increases the risk that you will not pay it back. Thus, 30 percent of your credit score is based on how you manage your debt. When you get a credit card or a loan, you are given a maximum line of credit, which is the maximum amount of money you can borrow. If you borrow too close to the maximum limits, your credit rating goes down because creditors believe you are borrowing too much. Your credit rating would be higher if you had two cards with $100 limit, and borrowed $50 on each card, than if you had one card with $100 limit and borrowed $100 on that card.
New Credit and My Credit Rating
Every time you open new credit, it adversely affects your credit rating. First, it lowers the average age of your credit cards, which makes up 15 percent of your credit rating. Second, the creditor who you are borrowing the money from usually pulls your credit report to look at your credit score. When this inquiry is made, it shows up on your credit report. Too many inquiries can lower your credit rating---this factor makes up 10 percent of your score.
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