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Credit Rating Score
 Jun 08, 2004

Your credit rating score determines your eligibility for loans. In this article we will explain what a credit score is and what tell you what factors affect your credit score. Understanding how credit, credit scores, and credit reports work will help you manage your credit.

One of the most common measures of your credit worthiness is your credit rating. This is often referred to as your credit score. When you go to get a loan, open a bank account, apply for insurance coverage, try to get into an apartment, buy a cell phone or even get a job, your credit score might be looked at. It is very important that you have a high credit rating, or you may not get what you want in terms of financial products and services.

What is a credit score?

Your credit score is a numeric representation of your financial reputation. It is a one-number way for interested parties to sort of "sum up" your entire credit history. Different companies use different scoring systems. The most commonly used score is the FICO score, offered by the Fair Isaac Company, and which consists of a score derived from your three major credit reports. Each of the three major credit bureaus offers its own score, though. Because the statistical and proprietary formulas used to determine credit scores are different from the others, you will find that sometimes your credit score is different company to company. The real key is to have credit that is good enough that a discrepancy in scoring won't be large enough to make a difference.

Because each company uses a different method of scoring, it can be difficult to pinpoint exactly what information is prominent in your credit score. However, it is possible to get a pretty good idea of what factors go into your credit score, whether it is a FICO score, or a score from one of the three major credit bureaus.

Factors that affect your credit score

Understanding what affects your credit rating is important. Here are some of the things that go into determining your credit score:

    Payment history. This is generally considered the most important factor in determining your credit score. Your payment history is how often you make payments on time, whether you make them in full, and whether you exceed your credit limit. Your payment history is one of the best gauges of how you will perform in your new debt obligation, and it is no surprise that it is the most important factor.

    Total amount of debt. Another important item is how much debt you already have. This is often compared to your income in a measurement known as debt to income ratio. If you already have a great deal of debt, then you might not be able to handle more, and this is taken into consideration. Another thing that is often considered is how much of your available credit has been used up. As you exceed 50% of your available credit, your credit score often starts to slip downward.

    Credit history. Another important factor is your credit history. This is generally looked at in terms of how long you have had credit. If you have had credit for 10 years, it is looked on as more favorable than if you have had credit for only three or four years. The longer your credit history, the higher your score. This is why some people with no credit and applying for the first time are surprised to see that sometimes they have a lower credit score than someone who has been a little irresponsible with his or her credit.

    Types of credit. With your credit score, the types of credit you have matter. The score takes into account whether or not you have department store credit card as opposed to a major bank credit card. Payday and car title loans are considered to be inferior forms of debt, and they are scored lower than mortgage loans and regular auto loans. The sort of debt you have can make a difference in your score, since the less desirable types of debt are often associated (and perhaps wrongly) with people who are less responsible with their financial decisions.

    Number of credit inquiries. If you have applied for credit recently, you will find that the inquiries made will affect your credit score. If you have been actively seeking for more credit, it can be seen as a problem by some companies, and your credit score will reflect that. It is worth noting that so-called soft inquiries, which are made by marketing companies to determine your "eligibility" for certain offers, do not affect your credit score.

Once you know what goes into your credit score, you can work at improving in the necessary areas. You want to have a good credit score so that you can get the financial services and products you need when you need them.

Related Article: Fix Your Credit Report >>

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