How to Understand Credit Rating Reports and Raise Your Score

Understanding your credit rating is key to managing it. See the factors in calculating a credit score and how you can improve your score.
By Richard Barrington

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Often, people become aware of their credit score only once it has become a problem. For example, a loan or other application gets turned down, and you find out about reports with more detail on your financial history than you remember.

Rather than wait for your credit report to become a problem, learn more about your score and manage it to your advantage.

What Financial Factors Make up a Credit Score?

Credit scores are a commonly used way to measure credit risk. In order of importance, here are the components that make up a credit score:

1. Payment history

At 35 percent, this is generally the largest portion of a credit score, though scores are weighted differently depending on how relevant each component is to an individual’s situation. Your payment history takes into account how well you’ve kept up with payments on credit cards and loans in the past. It also looks at whether you have any history of bankruptcy or debts referred to a collection agency.

2. Amounts owed

The amount of money you currently owe generally will comprise 30 percent of your credit score. This includes:

  • How many different accounts you owe money to
  • What percentage of your available credit you are using (AKA credit utilization)
  • What portion of any existing loans you have paid down

3. Length of credit history

This will usually represent 15 percent of your credit score. It takes into account your oldest and newest sources of credit, as well as the average age of all your credit accounts. Note that from a credit utilization standpoint and in terms of the age of your accounts, closing old accounts might actually be counter-productive.

4. Credit mix

Around 10 percent of your credit score will be based on the type of credit accounts you have. It is considered beneficial to have a mix of credit card accounts and installment loans (such as a mortgage or student loans), as long as you have a good payment history with them.

5. New credit

Another 10 percent or so of your credit score is based on how many new accounts you have opened recently. Opening several new accounts in a short period of time can be a red flag.

The Connection Between Credit History and Creditworthiness

Credit scores are useful because they take a number of factors and boil them down to a single, readily comparable number. There has been a movement in recent years to encourage lenders to consider other factors when a person has had limited access to credit in the past. In any event, credit score is not the only thing a potential creditor is likely to look at.

To a large extent, credit scores represent your history with credit, while overall creditworthiness is a function of both your past performance and your future ability to repay the loan. Income (particularly your income in proportion to your overall financial obligations) is an important factor in creditworthiness, as is the length of time you have held your current job.

4 Keys to Good Credit

Obviously, there are many things that impact creditworthiness, but there are four things that should increase your credit score:

1. Work to establish a good credit history

You might think of having no debt as being a sign of financial rectitude, but to potential creditors it simply means you are an unknown. Establishing a history of modest borrowing and timely payments shows that you have had successful experience with managing credit.

2. Think before you open or close an account

A big part of what creditors are looking for is stability, so be aware that too many changes, like closing older accounts, can upset that stability.

3. Make your payments on time

It’s not enough that you eventually pay off your debts – you have to demonstrate that you generally make your scheduled payments on time. Use automatic bill payments if they help you keep on track, and maintain a regular schedule for paying your bills.

4. Focus on paying off balances

Don’t take on debt simply because you can make initial or minimum payments. Budget for the future to make sure you can pay down the debt within a reasonable time and make any balloon payments that you’ll face in the future.

Maintaining good credit impacts more than your ability to qualify for loans and credit cards. It can also affect your insurance rates, and may be a factor that potential landlords or employers look at as an indication of your reliability. Because your financial history is such a big factor in determining creditworthiness, it is something you have to start managing even before you have a need for credit.

Frequently Asked Questions

Q: I just interviewed for a job and it went well. The potential employer said the next step is to check my references and my credit report. Why my credit report? Is that even fair? I had some credit problems a few years ago, and though I’ve worked to improve it, I’m sure there are still some issues there.

A: Checking a credit report is a fairly common, though still somewhat controversial, part of the hiring process for many companies. Whether you agree with it or not, here are three reasons why a company might want to review the credit history of prospective employees:

  1. To see what it says about how you handle responsibility. Companies that extend credit, such as credit cards, rely on people to pay it back. What is an employer to think if they see someone has consistently blown off that responsibility?
  2. To anticipate a potential source of distraction. People in serious credit trouble spend a great deal of time fending off people they owe and trying to solve their financial problems. If you were an employer, is that what you would want to be foremost in an employee’s mind?
  3. To flag potential security risks. If a job involves financial responsibility, an employer is going to want to know whether an employee is under pressures that would make them especially vulnerable to temptation.

In this case, you know that this potential employer intends to look at your credit report. In general, anyone looking for a job should consider it a possibility.

4 things job seekers should do with credit reports

Here are four steps to take for your job search to better deal with credit issues you may have:

1. Check a recent copy of your credit report

If interviewers are going to be looking at your credit report, you should at least see what they are seeing. You mention having had problems in the past. You need to know which of these are still reflected on the report. In the process of discussing your credit history, you don’t want to resurrect issues that have already dropped off your credit report.

2. Fix any credit errors

Errors happen, so get them cleaned up before anyone gets the wrong impression.

3. Submit an explanation of negative marks on credit history

If there are legitimate negative issues on your credit report, you have the right to attach a 100-word explanation of them. Don’t try making excuses for everything though. Just point out things that occurred because of unusual circumstances that are not likely to be repeated. Also mention steps you have taken to rectify the problem.

4. Meet the credit issue head on

Whatever credit mistakes you may have made in the past, you should address them openly with any potential employer who asks for permission to view your credit report. You need to demonstrate that you have taken responsibility for your mistakes and have changed your ways.

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Richard Barrington