Credit Score Ratings

Susan Weber
Credit Report

Credit score ratings are a way for you to show lenders how well you can manage credit. With a little time and effort, even a low rating can be improved.

Importance of Credit Score Ratings

Your credit score rating is a three-digit number reflecting the details of your credit history. The rating is used by a lender to decide whether they want to extend credit to you, how much credit they will extend and what interest rate they will charge. The higher the number, the lower the potential credit risk to the lender.

The actual rating can make a major difference in the amount of interest you will pay each month on a credit card or over the life of a long term loan such as a mortgage. Be sure that you review your credit score before you apply for credit so that you have time to make any changes that could improve your credit score.

FICO is the Most Popular

FICO, the credit scoring system developed by Fair Isaac Corporation, is the most frequently used credit scoring system used by the major credit bureaus. A credit card issuer will use the FICO score, combined with their own added credit decision parameters, to determine if a consumer will be a good credit risk and should be given a credit card, a credit limit increase or a lower interest rate.

A FICO score can range from anywhere from below 500 to over 800. According to Fair Isaac and Company, about 45 percent of the consumer FICO scores in 2010 were in the 700 to 799 range with only 13 percent of consumers having credit scores of 800 or higher. Over time, as lenders tighten or loosen their credit requirements, the lender will also reevaluate what they feel is an excellent score versus what they feel is only a good credit score. Not all lenders have the same credit requirements; so, a 700 score may be considered a "very good" score by one lender while another credit card issuer may consider 700 an excellent score.

Learn Your Rating

Each of the three major credit bureaus will develop a credit score for you based on the credit history you have with that credit bureau. By law they are required to provide you with a free copy of your credit report annually; however, you will have to pay to receive your actual credit score. There are several ways to obtain a free credit score including signing up for a credit monitoring service.

Once you know your credit score rating you can work on ways to improve your score.

Improve Your Rating

With just a few changes in how you handle credit you can improve your credit score ratings. How you pay your bills, the amount of credit you have and the amount of credit you use all play important roles in determining your credit rating. By changing any of these factors you can improve your credit rating. For example:

  • Stop making late payments. Sign up for automatic payment from your checking account so that you credit card payment is always made on time. Showing a record of on-time payments can have a sizeable effect on your rating.
  • Use each of your credit cards at least once every six months and then quickly pay off the balance. This will reinforce to the credit card issuer that you are interested in using credit and that you will pay it back quickly. An added advantage to this periodic use of your cards is that a credit card issuer is less likely to cancel your account if you keep the account active by using the card. This can keep you from losing access to a credit card with a low interest rate.
  • Concentrate on only using up to 20 to 30 percent of an available line of credit. Using large amounts of your available credit can result in a lower credit score.
  • If you don't qualify for a credit card, obtain a secured credit card where you can use a savings account as collateral for the card. Be sure that the card issuer regularly reports payment history to the major credit bureaus so that you can start building a good credit history which will, in time, also result in a better credit rating.

Take Charge

Credit score ratings should not be a mysterious part of your financial information. Know your credit score and take active steps to improve your credit rating.

Even if you don't plan to make any major purchases in the near future, an excellent credit rating can significantly reduce the amount of interest you are charged on your existing credit cards. You can manage and improve your credit rating; you just need to take charge of how you handle credit.

Credit Score Ratings