Identification

• A credit rating is an assessment of the risk a lender takes by extending credit to an individual and is based on information about that individual's past use of credit. The information is contained in a credit report (also called a credit history.) The credit rating is usually summarized by the credit score. This may also be called the FICO score, which is by far the most widely used credit scoring system (FICO stands for Fair, Isaacs, & Co., the firm that markets the scoring system.) The FICO score ranges from 300 to a perfect score of 850.
  
  

History

• The information on a person's credit history is what is important. The FICO score merely summarizes that information. The credit history contains a record of any late payments (especially any more than 30 days late), income and total debt. Much of the information is in the "trade lines" which list creditors, the amount owed to each, the size of monthly payments and whether the account is paid up to date. If a consumer has a bankruptcy, foreclosure, tax lien or defaulted debt these items are recorded as well. The credit report also lists how long the consumer has used credit and recent credit applications or account closings.
  
  

Credit Score

• The credit score has five main components. By far the most important is your record of on-time payments. This counts for 35 percent of the entire score, so it's critical to make payments on time. The next most important factor is your total debt compared to your income (30 percent). How long a person has used credit counts for 15 percent. Frequently opening and closing accounts can count off as much as 10 percent. The final 10 percent is based on the type of debt you have. Secured debt is viewed more favorably than unsecured debt (like credit cards or signature loans.)
  
  

Significance

• Lenders check a potential borrower's credit report in order to determine how likely it is they will be repaid, based on the person's past credit use. This is why young people often find it hard to get credit. There is no record for a lender to evaluate. Banks and other financial institutions also check credit ratings before opening accounts. Even some employers will check a job applicant's credit rating before making a hiring decision.
  
  

Consumer Rights

• Under the Fair Credit Reporting Act all consumers are entitled to a free copy of their credit reports (not their credit score) each year from the three major credit reporting agencies. The FTC has authorized only one source, Annual Credit Report, to provide free reports. Go to their website (see Resources below) or call 877-322-8228 to order your free credit reports. If you find an error or outdated information, you can file a dispute with the credit reporting agencies to have the information corrected. The FTC provides complete guidelines for filing disputes online (see Resources.)