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Your Credit Rating Matters

In recent decades, consumers have become increasingly dependent on credit. When you use credit, you are borrowing money that you promise to pay back within a specified period.

Having lenders extend you credit is a great privilege. If you have a good credit rating, enjoy it. Also, use credit responsibly. Credit is fragile—one slip-up can create major problems—and you can harm your credit rating without even being aware of it. Therefore, you must understand your credit report.

Key Takeaways

  • Your credit rating plays a major role in your ability to get a mortgage, make major purchases, or rent an apartment.
  • If you have a poor credit rating, lenders may not shun you; instead, they’ll lend you money at a higher rate than that paid by someone with a better credit rating.
  • Five major factors impact your credit rating: credit payment performance, credit utilization, credit history length, credit mix, and inquiries.
  • There are key strategies to improve and maintain your credit rating, such as making payments on time, not overextending yourself, and limiting your credit applications.

Why Your Credit Rating Matters

Few things in life follow you as your credit rating does. Your credit report and rating compose a financial snapshot that presents you to the business world. Your financial history can affect how easily you can get a mortgage, rent an apartment, make big-ticket purchases, take out loans, rent a car, and even get hired in some industries.

When you apply for a credit card or even a cable hookup, lenders check your credit rating. Your credit rating helps to determine the probability that you could and would pay back the money that you have borrowed. It also indicates the degree of risk that you pose to a lender.

If you find errors on your credit report, such as incorrectly reported late payments, you may ask the credit bureaus to correct them.

Increased credit risk means that a risk premium must be added to the price at which you borrow money. If you have a poor credit rating, lenders may not shun you; instead, they’ll lend you money at a higher rate than that paid by someone with a better credit rating.

What Comprises Your Credit Score?

When you borrow money, your lender sends information to a credit bureau, which details, in the form of a credit report, how well you’ve handled your debt. This history appears in your credit reports of the three main U.S. credit bureaus: Equifax, Experian, and TransUnion. The credit bureaus also capture your credit history into a single number known as a credit rating or credit score. The bureaus base your credit rating on five major factors: 

  1. On-time payment history
  2. Credit utilization ratio
  3. Length of credit history
  4. Credit mix—types of credit available 
  5. Frequency of applications for new credit

Although all these factors are included in credit score calculations, they are not given equal weighting. The table below cites the breakdown of the above factors by importance. You’ll see that, at a 35% weighting, the most important factor to your credit rating is to show a history of paying your debts on time.

Moreover, maintaining a low utilization ratio by not keeping huge balances on your credit cards or other lines of credit (LOCs), having a long credit history, and refraining from constantly applying for additional credit also will help your rating. Below are the top five key factors used in determining credit ratings.

FICO Rating

FICO is an acronym for Fair Isaac Corp., which created the statistical software used to calculate credit scores. Lenders use borrowers’ FICO Scores along with other details in their credit reports to assess credit risk and determine whether to extend credit. FICO Scores range from 300 (extremely high risk) to 850 (extremely low risk).

Having a high score increases your odds of getting approved for a loan and helps with the conditions of the offer, such as the interest rate. Having a low FICO Score can be a deal breaker for many lenders.

As pictured in the graph below, in 2011, the average FICO Score in the United States reached a low, at 689. In 2018, the average U.S. FICO Score hit a new high of 701, showing a steady upward trend in U.S. credit quality. The average FICO Score in the U.S. rose again in 2021 and is now at 714, the fourth consecutive year that the average score has increased.

VantageScore Rating

The VantageScore system, developed in 2006, is weighted differently from FICO. In this method, lenders consider the average of a consumer’s available credit, recent credit, payment history, credit utilization, depth of credit, and credit balances. The biggest weight is given to payment history, depth of credit, and credit utilization.

The VantageScore range ranges from 300 to 850. Those with a score of 300 to 499 are deemed to have very poor credit. A score from 500 to 600 is considered poor, 601 to 660 is considered fair, and 661 to 780 is considered good. A score of 781 and greater is excellent. Although an increasing number of creditors are using this system, it is not nearly as popular as FICO.

Why You Should Check Your Credit Report Regularly

Because your credit rating can have a huge impact on many of life’s major decisions, you do not want it to contain errors or negative surprises. If you do find errors, you may correct them with the credit bureaus. If your report contains data that reflects you poorly, then you should be aware of the issues so that you may explain them to potential lenders instead of being caught off guard.

Other parties view your credit report—generally with your permission—and so should you, of course. By law, you are entitled to review the information in your credit report annually, and doing so does not affect your credit score. Each of the three U.S. credit bureaus—Equifax, Experian, and TransUnion—allows consumers one free credit report annually, via

Tips to Improve or Maintain Your Credit Rating

If your credit rating is good, then you want to improve or maintain it. If you have poor credit now, then rest assured that it’s possible to improve it—you do not need to live with a particular credit score for the rest of your life.

Credit bureaus allow information to fall off of your credit report in time. Typically, negative information falls off after seven years, but bankruptcies stay on your report for 10 years. Below are some actions that you may take to improve or maintain your credit score: 

  • Make loan payments on time and for the correct amount.
  • Avoid overextending your credit. Unsolicited credit cards that arrive by mail may be tempting to use, but they won’t help your credit score.
  • Never ignore overdue bills. If you encounter any problems repaying your debt, call your creditor to make repayment arrangements. If you tell them that you are having difficulty, they may be flexible.
  • Be aware of what type of credit you have. Credit from financing companies can affect your score negatively.
  • Keep your outstanding debt as low as you can. Continually extending your credit close to your limit is viewed poorly.
  • Limit your number of credit applications. When your credit report is “hit”—that is, viewed—an excess number of requests for credit might be perceived negatively.

What Is the Fastest Way to Improve my Credit Score?

The fastest way to improve your credit score is to address whatever makes your score low in the first place. If you have inaccurate late payments or delinquent accounts on your report, have them removed. If you have a high debt-to-income ratio, try to pay off your debt as much as possible, potentially by getting rid of the loan entirely if, for example, your ratio is high because of a car loan on a vehicle that you could sell. If your score is low because of inadequate credit history, see if you can be added as an authorized user on someone’s long-running account with an on-time payment history and a low credit utilization percentage.

How Can I Have Errors Removed From my Credit Report?

If you believe that a delinquent account, also referred to as a charge-off, is being reported on your account, then your first step will be to dispute the information with the credit bureau that is reporting the inaccurate information. The credit bureaus are Equifax, Experian, and TransUnion. Each will have their own steps for having errors removed, but be aware that the process should be free to use.

How Can I Check my Credit Score?

Many banks, credit card companies, and credit unions now give you access to your credit score on their website and their statements. If this isn’t available to you, there are dozens of websites that will provide you your credit score for free, often with advice and insights. Investopedia’s top pick for obtaining free reports and scores is Credit Karma.

The Bottom Line

A good credit score may not directly change your life, but it will make obtaining a loan cheaper and easier. If you firmly oppose going into any type of debt, even a mortgage, credit scores are still frequently checked when renting a car or apartment, seeking a job, or getting utilities connected. Even if you never intend to use it, having a good credit score can make life easier. Boosting your credit score is definitely possible even if you currently have a bad one. Once you have a good score, keep it that way by managing your credit responsibly.