Credit Rating FAQ

Your credit rating is derived from your credit report, which details all your behavior related to borrowing and repaying money. Credit ratings can also be hurt by late bill payments, apartment evictions and home foreclosures. There are many misconceptions about credit reports and credit ratings that can be cleared up simply with straightforward education. Lenders, employers and others utilize credit ratings to inform their decisions about providing loans, hiring employees and for other purposes.

Your credit rating is derived from your credit report, which details all your behavior related to borrowing and repaying money. Credit ratings can also be hurt by late bill payments, apartment evictions and home foreclosures. There are many misconceptions about credit reports and credit ratings that can be cleared up simply with straightforward education. Lenders, employers and others utilize credit ratings to inform their decisions about providing loans, hiring employees and for other purposes.

What is a Credit Report?

Credit reports are maintained by the three major consumer credit bureaus (TransUnion, Equifax and Experian) to provide companies with information about consumer credit behavior. These reports contain information about all your active credit accounts and debts as well as older accounts going back up seven years. The Federal Trade Commission (FTC) obligates companies under the Fair Credit Reporting Act (FCRA) to provide accurate information to the credit bureaus.

Credit Rating Components

The Fair Isaac Corp. (FICO) computes credit rating, also referred to as "credit score," based on a weighting of five separate factors. FICO revealed its approximate weighting percentages at the end of 2008 after keeping the formula secret for decades. The corporation calculates score using 35 percent based on payment history (whether there are late payments on any accounts), 30 percent based on what percentage of your credit limits are utilized, 15 percent on the length of credit history, 10 percent on whether you have opened new accounts recently, and the remaining 10 percent based on the mixture of secured and unsecured credit that you possess.

Credit Rating Explained

Credit scores range from 350 to 850. Any score below 500 is considered to be bankruptcy-level credit, and scores above 800 are near-perfect. Anyone with a credit score above 680 will likely qualify for loans at the "prime," or most affordable, rate, while those with a score below that amount are "subprime" borrowers. Individuals with a higher credit rating will qualify for less expensive loans of larger amounts than those with lower scores.

Why Does my Credit Rating Matter?

Credit rating is used as a metric to gauge overall financial responsibility and character. Lenders know that customers who have a history of paying loans on time are more likely to continue to do so compared to those who have little established credit history or those with a history of late payments or delinquencies. Individuals with a record of exemplary financial behavior are rewarded by lower interest rates on loans, a faster approval process and access to larger loans. People with bad credit ratings are punished with denials for loan applications and higher interest rates.

How Do I Order my Credit Report?

The least expensive and most convenient method for ordering your credit report online is to use the Annual Credit Report website (see Resources). The credit bureaus entitle each U.S. citizen to one free credit report from each bureau per calendar year. Alternatively, order your credit report online at the websites of TransUnion, Equifax and Experian. You may also contact each company by telephone to have your credit reports mailed to you. The information on each credit report is not necessarily identical, so review all three of them.