We all know that our financial transactions are reported to

credit agencies that track how well and how quickly we pay our

debts and that when we apply for a loan for one reason or

another, those agencies report our credit history to

prospective lenders. However, most of us don’t know a great

deal about how that actually happens and how our credit is

rated.

The fact is that credit reporting has evolved to an industry

all of its own. Just a few short years ago, when someone

applied for a loan, he or she put down credit references –

retail stores, banks, or other people or places with whom they

had done business in the past. As a matter of course, the

lender checked the references and decided whether or not to

grant a loan based on an amalgamation of the responses from

them. That really isn’t the case any more.

Instead, there are three major agencies that track everyone’s

credit and provide a credit rating when contacted by a

potential lender. The three agencies are Equifax, located in

Georgia; Experian, located in Texas; and Trans Union, located

in Pennsylvania. When someone applies for a loan, the lender

generally contacts one of these three agencies and obtains a

credit score and the score helps the lender decide whether or

not to make a loan.

Credit Scores

How is a credit score calculated? Until recently, that was one

of life’s great mysteries, but over the past few years new

rules and regulations have made the information more readily

available. Your credit score is a number that ranges from 300

to 900, although the exact formula for determining that number

is proprietary and is not released. This is how it works in

general.

· 35% of the score is based on the history of how you have (or

have not) paid your bills. The agencies track how many of your

bills have been paid on time and how many haven’t, as well as

whether or not any of them have been referred for collection.

The more recently you have had a collection or failed to pay

something on time, the worse your score will be.

· 30% of the score is based on the debts you have at the time

of the rating. It is includes car and home loans, credit card

debt, retail store debt and the like. If you have several

credit cards and they are all limited out, your credit score is

lower.

· 15% of the total score is based on how long you have had

credit. If you have never had credit or have only had credit

for a short time, the lower your score will be.

· 10% of the score is based on the number of inquiries that

have been received about your report, particularly if there are

several in the past year.

· 10% of the score is based on your current credit and the

types of credit you have. The number of credit cards and loans

you have, as well as the available credit you have on your

credit cards and considered.

Because your credit score is based on these factors and they

are constantly changing, your credit score changes along with

them. Therefore, there are things you can do to change your

credit rating and bring it up.

Changing your Credit Rating

The first thing to do is get a copy of your credit report and

make sure there aren’t any mistakes on it. If there are, take

steps to get them corrected. Errors in reporting do occur,

although the credit bureaus would like for you to think they

are foolproof. Here are a few more tips to improving your

credit rating.

· Don’t pay off the entire balance on your credit card. Keep

about 75% of it paid and keep a 25% balance. This applies to

multiple credit cards as well.

· Don’t get rid of your older accounts. Keep them open. The

credit reporters look at the age of your accounts and the

longer you have had a particular account in good standing, the

better.

· Pay your bills on time. Experts say that this is probably the

most important factor of all.

· Prevent inquiries to your credit report whenever possible.

Your score drops with the number of inquiries.

The real key, however, is to only get credit when you need it

and when you do get it, use it wisely. You can damage your

credit rating with just a few late pays or collections and it

may take up to a year of paying everything on time to build up

a better rating.