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Home › Articles › Your Credit › Credit Ratings 101

Credit Ratings 101

The Importance of Knowing Your Credit Score

By Cara J. Stevens

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What Determines My Credit Score?
It all breaks down to a mathematical formula. "The most dramatic effect of a credit score is on-time payment or payment history, which is 35 percent of your score," Killian says. "Length of credit history constitutes 15 percent; amount owed is 30 percent; credit (cards, mortgage, department store) makes up 10 percent; the age of long-standing credit is the last 10 percent."

To put it in more concrete terms, when it comes to credit scores, the borrower's entire credit history comes into play, at least for the past 10 years. "Late payments bring scores down dramatically," Wickell says. "Maxing out your credit cards is another common score downer. Bankruptcies and foreclosures bring down scores. A short credit history can cause lower scores, too."

It's also commonplace to find forgotten disputes behind an unexpected dip in one's score. "I had a test done by a medical lab a while back that insurance refused to pay," says Sandra Sherman, a beautician in Wantagh, N.Y. "I was arguing with the insurance company for a while and then just forgot about it." When she tried to refinance the mortgage on her house to take advantage of the new rates,Sherman found the unpaid bill was one factor keeping her from getting the lower rate. "I had also maxed out a credit card, which brought my score down even more," Sherman says. She says that she hadn't given much thought to her score after she got her first mortgage, and not staying on top of it really hurt her later.

Making Bad Credit Good
"There are no easy fixes,"says the National Foundation for Credit Counseling on their consumer information Web site DebtAdvice.org. "Despite the companies who promise it, good credit must be earned." If you find negative items on your score, whether it's maxed out credit cards or unpaid debt, work with the creditor directly to create a mutually acceptable plan that will resolve the item as quickly as possible.

"Once I paid off my car loan, I had the bank write a letter of satisfaction to the credit reporting agency," Sherman says. While any late or missed payments will remain on Sherman's report for between seven and 10 years (depending on the specific state's regulations), the more quickly the issue is resolved, the better.

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