It is important to know how a credit score is calculated if you want to maintain a perfect score. But first of all, do you know what a credit rating is? Why would you want to have the highest score possible? The answers to these questions may seem obvious but you will soon find out how complex this may be.

What is a credit rating? It also goes under the name of FICO score, which is the credit scoring model of Fair Isaac Corporation that established the credit rating most used worldwide. This is a number that is based on your credit history and represents to creditors your likelihood of paying a loan on time.

What does this FICO score really mean? This score is considered to be an index of risk. It indicates the level of risk involved for a creditor when conceding a loan and determines the rate at which the creditor will lend you the money. In other words, if your credit rating is high, you will be conceded the loan at a low interest rate. On the other hand, if your credit rating is low, you might not get the loan or if you do get it, it will be at a very high interest rate.

So, how is this FICO score calculated? A percentage of the score is given to different criteria. It may be broken down to 5 different factors that are taken into consideration for tallying this score.

1. Past Payment History (35%)
The greatest percentage is allotted to how well you have paid your debts in the past, taking into consideration any late payments.

2. Current Debts (30%)
The second largest percentage is based on how much you owe at the present time. It is usually calculated as a ratio of what you owe divided by how much available credit you have. In general, to keep a good score, you should maintain this ration under 35%. In other words, for every thousand dollars of allotted credit, you should only owe $350. Don’t get me wrong, I’m not saying your credit rating will decrease as soon as you get a loan. I only want to bring to your attention that it is not a good idea to have many small disperse loans. This tends to portray you as someone that might not be able to pay its debts, consequently lowering your credit rating.

3. Duration of Credit History (15%)
In third place comes how long you have had a credit history. The older your history the higher your rating. This makes sense, just as you can better judge someone’s personality by how long you know that person, the same goes with a credit institution. If you have a long history, they can tell if you are overall a good paying customer. Thus, be able to judge if you manage your finances well.

4. New Credit Accounts (10%)
Every time you inquire about applying for a loan, just keep in mind that this can lower your credit rating. Creditors will not see with a good eye if, in a period of one year, you start opening accounts with various institutions.

5. Credit Diversity (10%)
On the other hand, credit diversity is beneficial to your credit rating. If you can manage several different kinds of loan, this will give you some extra points. For instance, you can be paying off your car, mortgage or some other loan.

So, now you know what a credit rating is and how to maintain a good standing, but do you know how this translates in numbers? A FICO score extends from as low as 300 to as high as 900 points. Here is the breakdown.

Excellent Credit – 720 and above
Good Credit - 660 to 719
Fair Credit - 620 to 659
Poor Credit – 619 and less

Where do you stand? If you don’t know what your credit rating is, you can get a copy from a financial institution. However, be prepared to pay for this service. It is recommended that you do some research to find out which credit bureaus charge the least.

Okay, so you have a low credit score, but is this the end of your financial power? Definitely not! What this simply means is that you will have a harder time in obtaining a loan and when you do, it will be at a very high interest rate.

Credit repair can have you save money on the long run. Someone with bad credit will end up paying more in interest rate than someone with good credit. Keep in mind that credit is a very powerful financial tool which you should learn to use well. Are you among those who have bad credit? Don’t give up hope, help is on the way. Reading this article is your first step in a long journey to financial freedom. At the end of this journey you will have acquired a good credit rating and financial success.

When the time comes to look into repairing your credit, it is a good idea to get a hold of your credit report. All your credit history will be detailed on this report. Here you will find out if you have missed a payment, how much you owe to your creditors, and much more. Keep in mind that all this is taken into consideration when assessing your credit score. Furthermore, your credit report does not only list your credit history but also your work history and public records. Needless to say, this credit report should be looked at in minute detail for any errors. And any erroneous data appearing on the report can be disputed with the credit agencies. If this happens, the lender will be given 30 days to justify its claim. After this period, it can be taken off your credit report if it is unfounded. You can also write directly to the lenders and negotiate an arrangement so they remove their claim from your credit report. How long do these collections remain on your report? It depends on the type of collection. For instance, if it’s a standard collection it will stay for 7 years, and if it’s a bankruptcy it will stay for 10 years. Although this credit situation influences your credit score, its importance is lowered as time goes by. In fact, you can increase your credit score soon after a bankruptcy if you start having an excellent payment history.

Is your credit score still a major preoccupation for you? Perhaps your best solution would be to get some professional help. If you are afraid this might cost too much, don’t worry. Some law firms that specialize in fixing credit charge a small monthly fee for their services. The advantage of such a service is that you can be assured of always maintaining a high credit score. These law firms can negotiate with your creditors so your bad payments won’t show up on your report. Also, let’s not forget that you are never immune from identify theft. These law firms can also keep a watchful eye on this for you. Just imagine you having a bad credit report, consequently paying more for your mortgage, because someone else used your name! This should not happen..

On the whole, credit repair is crucial in order for you to have a healthy and happy financial life. Why pay more when asking for a loan? Remember, if you take care of your credit score, it will take care of your financial future.

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Your credit rating is drawn from your credit report, which outlines your borrowing, charging, and repayment activities. A good rating helps you reach financial goals; a poor rating limits your financial opportunities.

Since your credit report influences whether you are able to buy a home and get a job, it is extremely important to protect your credit rating by making loan and bill payments on time and by not taking on more debt than you can handle.
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