When Was the Last Time You Checked Your Credit Rating?

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.

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.

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.