What Does My Credit Rating Mean?

Have you ever asked yourself “what exactly does my credit rating mean?”, well, you’re not alone.  Right after your Social Security number, and maybe your phone number, your credit rating is the the number that will have the biggest impact on your life.  And while it’s possible to get an unlisted phone number, you can’t get an unlisted credit rating.  And you wouldn’t want one even if you could, unless you never want to borrow money again.  I used to be in the dark about what this number means, but when I started investigating my credit rating, I found out how the system works.

I learned that the technical term for my credit rating is a FICO score.  FICO stands for Fair Isaacs and Company.  That’s the name of the firm that came up with the formula for calculating credit ratings.  There are other credit scores, but FICO is the big Kahuna, and the others are pretty similar.  And, while the exact formula is a closely guarded secret, it turns out the basics aren’t.  Your credit rating can range anywhere from 300-850, and the higher the score the better.

Your credit rating is based on five factors:

1.  How timely you are in making your payments.  This counts for about 35 percent of your overall score.

2.  Your total amount of debt, especially the ratio between how much of your available credit you’ve accessed compared to your total available.  This makes up about 30 percent of your score.

3.  How long you’ve had credit.  This counts most against young people of course, but it’s only weighted at 10% of your score.

4.  The different kinds of credit you’ve used, such as bank loans, credit cards, loans from finance companies, mortgages, etc.  This accounts for 10 percent of the score.

5.  Recent applications for credit and credit taken out recently.  This is usually considered a negative, but only accounts for 10% of your score.

There you have it.  That’s what your credit rating means, and how it’s factored.  With this knowledge, you should be able to better understand your FICO score and what it means for your ability to borrow money.