How is a Credit Score Established

How is a Credit Score Established
  • Examine the steps to take to establish a good credit rating.
  • Pay your bills on time and monitor your credit utilization.
  • Consider a secured credit card if no one will grant you credit.

What is a Credit Rating and How is it Established?

A credit rating is simply someone's assessment of how well you will be able to pay back money lent to you. Usually, that "someone" is a credit reporting agency; however, creditors themselves will also make their own assessments about your credit worthiness. This is usually based on the scores you receive from the credit reporting agencies and is determined by requirements that can vary a great deal from one creditor to the next.

Starting From Scratch

Credit can be established in a number of ways. Perhaps the most common is the opening of a credit card account. It can be difficult to open your first credit card, because you have no history for the creditor to view. If no one will grant you credit, a secured card (a card that requires you to pay money into an account the creditor controls before you receive a card) may be the best way to establish credit initially. You can also use low balance store cards or gas cards that let you prove that you can pay your monthly payments back, before qualifying for a larger balance credit card. These cards usually come with a high interest rate, so work hard to pay the debt in full each month, avoiding the high finance charges.

Having someone co-sign for you is another way to establish credit. Co-signing is very risky for the co-signer, as he or she is taking full responsibility for paying the debt if you default. That means that someone who co-signs on a loan to help you qualify for a loan or improve your credit risks harming his or her own credit. Because of the effects of co-signing for a loan, it is usually hard to find someone willing to co-sign on a loan for you.

Credit Utilization

Again, credit is just one person's or one entity's estimation of your ability to repay what you borrow. Once you have established one or more trade lines on your credit, your score will be more directly related to the percentage of credit you carry as compared to the total amount you could carry, which is called your credit utilization, and your payment history on the trade lines you have. A trade line is any credit account where you have borrowed money and are paying it back such as a credit card, home loan, car payment, or signature loan. All your open trade lines and some of your closed ones will show up on your credit report and affect how your credit is rated.

As mentioned above, the amount of debt you are currently carrying when compared to your maximum size of your credit line is an important factor in determining your credit rating.  For example, if you have a credit card that has a $10,000 credit limit,and you are carrying a balance of $5,000, you have a 50% credit utilization on that card. This is more than the credit reporting agencies like to see. A standard recommendation is to keep your credit utilization at less than 30% on any individual cards and on an aggregate of all the cards you carry. Credit utilization of over 30% is not held against you when it comes to your mortgage or car loans.

Payment History

Payment history is another factor the agencies use to determine your score. Your payment history is the trend you set when it comes to paying off your debt, either an on-time minimum payment every month or a less-than-minimum payment, late payment, or other problem even one time. If your payment history is not spotless, it can cost you points on your credit score, and may cost you money the next time you try to get a loan.

The length of time your trade lines have been open will also affect how your score. Closing old trade lines in favor of new ones won't help your score, since your payment history on the new trade lines will not be as long as it was on the old, giving the credit reporting agencies less on which to base your credit score. Work to keep your oldest account in good standing and keep it open. This will boost your credit score.


Credit and your credit score have everything to do with you use, manage, and pay on the credit lines you are granted. Take the right steps, establish a habit of handling your finances property, and your score will rise. Make poor decisions and your credit will suffer. Your credit rating is important when it comes to financing cars and homes, shopping for insurance, looking to rent a home or apartment, and even when interviewing for some jobs. To present the most responsible picture possible, you should take the proper steps to establish and maintain and excellent credit rating.


BBrad Stroh, Aug, 2014