How Your Credit Rating is Determined
If you plan on applying for a loan, your credit rating is important. A consumer credit counseling representative can help you analyze your credit report since the lender will use your credit rating as one of several factors in determining whether to grant you the loan and how much interest to charge.

Your credit rating is really comprised of two elements: the credit history and the credit score. Both are important tools in making loan decisions.

Credit History
Credit history is simply the written history of you owing money and paying it back. When you apply for a loan, the lender will ask you to supply your own credit history. Since people frequently can't remember all the necessary details or withhold the truth, lenders don't just rely on what borrowers tell them. Instead, they request a copy of your credit history from a credit bureau.

A credit bureau is a company that collects information from creditors about the payment histories of millions of consumers. When requested, the credit bureau will electronically send a printout of your credit history to the lender. This printout will include information about past and current loans, payment tendencies and the money you owe to creditors today.

For example, a printed credit history might look like this:

Industry	Date Reported	Date Opened	High Credit	Balance	Current Rating	Delinquency
Bankcard	6/00	4/99	$5,000	$750	current
Auto loan	5/00	2/98	$15,000	$10,000	current	60+  11/99
Retail	7/00	8/94	$350	$0	current

In this example, the consumer has a bank credit card, an auto loan and a retail credit card that have been reported to the credit bureau. It is possible that other loans have not been reported by lenders and therefore do not appear.

For the auto loan, you can see that:

•	This information was reported to the credit bureau in May of 2000
•	The loan was opened in February of 1998
•	The highest amount ever owed on the loan was $15,000. Because it's an auto loan, you can surmise that this was the original amount owed
•	The current balance owed on the loan is $10,000
•	A loan payment in November of 1999 was more than 60 days late.

Credit Score
In addition to the credit history, lenders are now frequently using a credit score as a tool in making loan decisions. A credit score is a single number that rates the likelihood of you paying back a loan on time. To determine this score, a computer system compares your financial profile with those of millions of other people. The more traits you share with people who pay their bills on time, the higher your score.

The most popular type of credit score is called a "FICO score." FICO scores range from 300 to 850. Here is a general guide to FICO scores from the web site E-Loan:

 

Excellent - scores above 730

Good - 700-729

Needs a closer look - 670-699

Higher risk - 585-669

No credit or limited credit - below 585

The Fair Isaac Company recently revealed that FICO scores are calculated using this formula:

 

•	Payment history -35%
•	Amounts owed -30%
•	Length of credit history -15%
•	New credit -10%
•	Types of credit -10%

Of course, this information doesn't do you any good unless you know your own score. Until now, the credit bureaus that calculate this score have not allowed consumers to see their own scores. Lenders were legally forbidden from providing this information.

How to Get Your Credit Score
Pressure from the U.S. Congress and the California legislature has convinced credit bureaus to make credit scores available. Here are your options if you want to see your score:

www.myfico.com and www.equifax.com
- The price is $12.95 at both of these web sites, which are operated by the Fair, Isaac Company and Equifax credit bureau.

www.experian.com
- Experian credit bureau provides credit reports for $14.95.

www.transunion.com
- TransUnion credit bureau provides credit reports for $9.95.

How to Improve Your Credit Rating
If a bad credit rating has made it difficult for you to borrow, here are some tips for improving your credit rating over time:

 

Pay Off Outstanding Balances
- If possible, pay off outstanding balances on credit cards. Then start paying off your balances every month. You'll save on interest and establish a solid history of paying back money on time.

Don't Apply for More Credit
- Your credit report includes the number of "inquiries" by lenders about your credit history. An inquiry is made every time you apply for credit. Frequent inquiries may be taken as a sign that you are an irresponsible user of credit. Don't apply for a credit card just because the store is offering a free tote bag or the rate seems low.

Make Payments on Time
- Payments more than 30 days late will usually show up on your credit history. If you have problems remembering to pay on time, sign up for automatic payments or set up a reminder system for you.

Wait
- Once you start making payments on time, you will have to wait until your credit rating improves. That's because past mistakes will stay on your history for several years. Lenders want to see a pattern of improved credit usage. It will probably take a few years of on-time payments in order to build a credit rating that will qualify you for loans. If you want to take out a loan, your credit rating is one of several factors that will be used to make the decision. The only way to ensure that you have a good credit rating is to pay your bills on time and use credit sparingly.

Does it matter today? Your credit rating only matters if you need a loan. If you have large amounts of outstanding debt, you probably should not be borrowing more money anyway. Make paying off the money you owe a priority and worry about your credit rating later.