How Is Credit Rating Evaluated?

Payment History

Your payment history is the single most important factor in deciding your credit rating. It accounts for 35 percent of your rating. If you are late on your payments, it will affect your score negatively. Conversely, if you always make timely payments, your credit rating will increase. The exception to this rule is for any grace period given to you by the financial institutions. For example, many lenders stipulate a 10 to 15-day grace period on late car payments. This means you can pay 10 to 15 days after the due date without the credit bureaus receiving a late payment report.

Amounts Owed

Your amount owed or total amount of debt, is the second largest contributing factor and accounts for 30 percent in determining your credit rating. The more debt you owe, and the more credit you convert to debt, the worse off your credit rating is. Since amounts owed accounts for your total debt, you can't easily lower some of your existing debt, such as car payments or mortgage payments. You can, however, use your credit card less often and use less of your available credit. MSN Money central advises using 30 percent or less of your credit card limit each month to avoid penalties to your credit rating.

Length of Credit History

Accounting for 15 percent of your credit rating, the length of your credit history has less of an impact on your scores than your payment history and amount owed, but is nevertheless important. An old credit account of at least six months in good standing is always better than a new credit account in good standing. New credit accounts themselves do not affect your credit score, but a lack of established credit negatively affects your rating.

Opening New Credit Accounts

Establishing credit is important when building your credit rating, but opening too many accounts at one time will have a negative impact on your score. The amount of new credit accounts must remain proportionate to your already established credit accounts so your score will not go down. For example, if you have a mortgage, auto loan and five credit cards, opening two new credit accounts will usually not harm your score. If you only have one credit card and open three new credit accounts, your score will suffer. New credit affects accounts for 10 percent of your rating.

Types of Credit

At 10 percent, the type of credit you use has the same impact on your credit score as new credit. Credit card accounts are good for building your credit score, but having too many will negatively affect it, and credit cards do not have as much of a positive affect as other credit, such as a mortgage. Auto loans also rank higher than credit cards. If you consistently make your payments each month, you will see a larger increase on your credit rating from a mortgage or auto loan than you will from your credit card accounts. Retail cards are the lowest form of credit, although they are good to build initial credit.