What Is a Credit Rating?
When someone talks about their credit rating, they’re talking about the same thing as their credit score. It determines who will lend you money, for how much, and at what interest rate. It might even determine whether or not you get a job or a cell phone contract.
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So what’s behind this seemingly magical three-digit number that has so much influence over your life? Essentially, a credit rating is the history of how well you have used credit in the past. It’s an attempt to distill your entire credit report into a single number.
The biggest factors in your credit rating are timely payment of your bills, followed closely by how much of your available credit you use. After that, your credit rating is a representation of how long you’ve been using credit, how many new accounts you have, and how many different types of credit (for example, personal loans, credit cards, car loans, etc.) you have and use.
Credit Rating Range Scale
There are multiple types of credit ratings, but in all systems, there is one constant: The lower your credit rating, the more likely you are to not to be able to pay back your loans per the agreed terms; thus, new lenders will be less likely to lend you more money or extend you new lines of credit.
Confusing things a bit is the fact that even in one scoring system you can have different scores. This is because private companies purchase scoring models, then tweak them to have their own proprietary secret sauce. What’s more, some of these third-party scoring agencies might have different information.
How Is a Credit Rating Determined?
How credit ratings are determined is touched on above. And again, different scoring systems will use different methodologies to determine what your credit rating is. If you want to have and keep good credit, here are the factors explained, in order of importance:
- Timely Payments: Pay all your bills on time every month. This counts for a little over a third of your credit rating.
- Credit Utilization: This is a fancy term for how much of your available credit you’re currently using. In general, studies show that people who use less of their available credit have better credit scores. Paying down debt can be one of the surest ways to increase your credit score.
- Length of Credit History / New Credit: These two factors are of approximately equal weight related to one another. Longer credit histories correlate with more responsible use of credit and, thus, better credit ratings. Similarly, people who have taken on a lot of new credit tend to be riskier from the lender’s perspective.
- Credit Mix: Finally, there is credit mix, which is how many different types of credit you have experience with.
Having a solid credit rating is important for anyone who wants to use credit in the future. This is especially true of anyone looking to buy a house.
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The good news is that having and keeping a strong credit rating isn’t always easy, but it is always simple: Pay your bills on time, keep your debts at a minimum and don’t take on new credit you don’t need, even if you don’t intend to use it. Do these things and you won’t have to worry about the nitty gritty of this important three-digit number.