Meaning of Credit Score Ratings

You may know that your credit score is an important factor in renting a home, getting a mortgage, obtaining new credit cards and, for some, even landing a new job. But do you know what factors contribute to your score? By understanding all the factors that contribute to your score, you'll better be able to manage your credit so you qualify for the best interest rates and offers in the future.

Timeliness of Payments

The largest chunk of your credit score is determined by whether you make on-time payments. This factor accounts for 35 percent of your credit score, according to Bankrate. A single payment made more than 30 days late may cause your credit score to drop by as many as 110 points. To build or maintain your credit rating, set up automatic payments to your accounts.

Debt Utilization Ratio

Paying your bills on time is important, but doing so doesn't necessarily mean that your credit score will be high. To keep your credit score in tip top shape, you also need to keep your balances down to 30 percent of your credit limits, or less if possible. Many people mistakenly believe that they can charge up a card if they pay the balance down before their monthly payment is due; however, creditors may report to credit bureaus at any point in the month. Also, this part of the score focuses on how much of your credit you're using -- so charging up to your limit is never a good idea. Instead of thinking of your credit allowance as your limit, think of 30 percent of it as your limit. For example, if your credit limit is $9,000, you should consider the amount you can spend up to as $3,000.

Length of Credit History

The longer you've had credit, the better your score. Therefore, older people generally fare better in this category, which makes up 15 percent of your credit score. To keep this part of your score healthy, it's important to hold on to your oldest credit card, even if it has an undesirable interest rate or a low limit. Use it a few times a year, then immediately pay off the balance so that the creditor doesn't shut your card down from lack of use.

Credit Expansion

This category is a tricky because you need new credit to make the most of your score; however, opening too many new accounts harms your score. Credit expansion accounts for 10 percent of your score, and it is based on the idea that you are responsible enough with your finances to handle more payments per month. But submitting too many applications for new credit at once makes you appear desperate for money, which makes lenders wary.

Credit Diversity

The last 10 percent of your score focuses on the type of credit you have. It's important to have both installment and revolving loans. Installment loans include vehicle loans or mortgages, while revolving loans include lines of credit and credit cards. You need to actually use this credit actively and pay the bills on time for them to impact your credit score.