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Credit Rating

Bad Credit Loan Guide Step 3: All About Your Credit Rating

    Your credit rating affects every aspect of your life. Where you live, the car you drive, the type of job you land, the number of credit cards in your wallet and if you're able to get a cell phone, all depend on your credit rating. And you thought I was exaggerating. That small file has a huge impact on your life all because it has the power to predict whether or not you will be able to pay your bills and repay your loans.
    To lenders and companies, your credit rating information is invaluable. Employers like it because they need to know if you are responsible. Lenders need it because they want to know if you have too much debt. Phone companies and landlords want it because they need to know that you pay your bills on time. So whether you're applying for a job, credit card, loan, apartment or cell phone, all of the companies will pull out the exact same thing -- your credit rating.
    Because your credit rating drastically affects your quality of life, it is important to know all about it. Almost all lenders use the same credit rating, which is your FICO score. FICO scores range from 300 to 850. With 300 being the worst credit score and 850 being the best.

What Affects Your FICO Credit Rating

    To get the best loans, housing, jobs and deals, you need to have a high credit score. The only way you can improve or maintain your credit rating is to know how it is derived. FICO scores use five categories to come up with your number. Each category is a certain percentage of the total number. Those five categories are payment history, amounts owed, length of credit, new credit and types of credit used.

Payment History: 35%

    Your payment history makes up the largest portion of your FICO score. It looks at all of the payments you make, how many were late and how late those payments were. It also considers how long it has been since your last late payment. If you have been in bankruptcy, sued or have any other adverse public records, those will also be considered in this portion of your score ("What's In Your Score").

Amounts Owed: 30%

    The amounts owed portion considers the type of and how much total debt you have. It also looks at how many accounts you have. Having too many credit cards or loans could lower your credit score (Opdyke 38). If you own credit cards, it looks at how much credit card debt you have compared to your credit card limit. If you have outstanding loans, it considers how much you have already paid off.

Length of Credit History: 15%

    The amount of time you have had credit affects your credit score because it tells how reliable you really are ("What's In Your Score"). If you have only had credit for a year and never missed a payment, you are not as reliable as someone who has had credit for 50 years and never missed a payment.

New Credit: 10%

    The amount of new accounts you open and loans you receive alters your credit score because it indicates how badly you need money ("What's In Your Score"). It is not good to open many accounts in a short period of time because it implies you may not be able to pay them all back.

Types of Credit Used: 10%

    The types of accounts you have -- mortgage, car loan, credit cards, debit cards, bank accounts -- are taken into consideration ("What's In Your Score").

The Rest of Our Bad Credit Loan Guide:


"What's In Your Score." myFICO. 6 Aug 2006.

Opdyke, Jeff D., The Wall Street Journal. Complete Personal Finance Guidebook. New York: Random House Inc., 2006.