Your Credit Rating

While your credit rating may appear to be a harmless set of three digits, it actually has significant impact on how you pay your bills, where you live and what you drive. Since the entire world can gain easy access to credit scores, it's imperative to know what the numbers are saying about you.
 
Simply put, a good credit rating helps you reach financial goals while a poor one results in serious limitations. Despite this fact, many Americans would prefer to not analyze their debt and are, therefore, unaware of what lurks inside their credit reports. If you are unsure of what your credit rating is or what it means, having a better understanding of it can improve our buying power and put you on the track to a more secure financial future.
 

The Basic Facts on Credit Reports

A credit report is essentially a record of your credit activity, listing credit card balances, loan histories and how regularly you pay your bills. The following three companies are the primary credit-reporting agencies:
  • Equifax
  • Experian
  • TransUnion.
They use software developed by the Fair Isaac Corporation to assign what are referred to as FICO scores. Your FICO score is the same as your credit rating, and it is designed to rate your risk for taking on more debt based on your credit history. Ranging from 300 to 850, higher scores reflect better credit ratings. As a result, the higher your FICO score, the better deals from lenders, creditors and landlords will likely offer you.
 
Specifically, reports contain credit information from:
  • banks
  • credit card issuers
  • mortgage companies
  • other lenders.
Credit limits, loan amounts, the identity of co-signers and payment patterns are included as well. Credit reports also disclose public record data, such as state and county court records on bankruptcy and tax liens, as well as the names of anyone who has obtained a copy of your credit report in the past year.
 
Monitoring Your Credit Rating
To keep track of your credit rating and prevent identity theft, financial experts advise that you check your own credit report from each agency every year. Everyone is entitled to receive one free report every 12 months from all three of the major reporting companies. Rather than contacting them separately, you can visit their Web sites to request your copy.

Improving Your Credit Rating

Although every lender has its own estimate of what constitutes a "good score," you can assume that anything over 700 is a positive result. If you rate over 760, consider yourself an excellent loan risk. If you're below 620, however, you will most likely be denied prime interest rates and other deals reserved for those with better credit scores.
 
While this news may seem discouraging, keep in mind that you have the power to raise your credit score. Since your payment history accounts for over a third of your credit score, start improving your credit by paying all of your bills on time. One late payment disclosed to a credit-reporting agency can drop a previously high score by as much as 100 points.
 
Additionally, if any of your lenders have turned your account to a collection agency, find a way to close the case as soon as possible. This includes seemingly benign debts, such as library fines. Finally, never be afraid to ask for help. Consulting a credit counselor to assist with the management of excessive debt will not impact your score.
 
To learn more about programs in your area that may help you master your credit rating, contact the National Foundation for Consumer Credit.
 
Resources
 
Investopedia (2008). Your 5-Minute Guide to Credit Scores. Retrieved February 11, 2008, from the MSN Money Web site.
 
Federal Reserve (2008). Your Credit Report: What It Says About You. Retrieved February 11, 2008, from the Federal Reserve Bank of San Francisco Web site.