Why Do Credit Bureaus & Credit Cards Rule a Credit Rating?

Though it may seem as if credit bureaus and credit cards rule a credit rating, the truth is that consumers are ultimately in charge of their own credit status. Credit bureaus are information clearinghouses and credit cards are only one aspect of a credit rating. A credit rating is a three-digit number that lenders, insurance companies and some employers use to determine if a consumer is a good credit risk.

Definition

• Credit bureaus compile and maintain information from creditors. The three main credit bureaus, Experian, TransUnion and Equifax, calculate credit ratings based on the information, but consumers' actions originate the report through their payments to the creditors. Credit cards are one type of credit that elicits a report to the credit bureaus. Mortgages, car loans and student loans are other types of credit that affect a rating, along with public information such as bankruptcies, foreclosures and court judgments.

Factors

• Each credit bureau uses a different calculation model to determine the three digit credit rating, but the underlying factors are the same. Timely bill payment, outstanding debt, credit types, new credit and credit history are the five main considerations used to calculate a credit rating.

Types

• The two main types of credit that impact a consumer's credit rating are revolving loans and installment loans. Mortgages and car payments are installment loans. Consumers borrow a finite amount of money at the outset of the loan, and then repay it on a set schedule. Credit cards are revolving loans in which available credit is tapped as needed and principal payments replenish the available credit.

Effects

• While credit cards do not rule a credit rating, the credit-to-debt ratio is a large factor in calculating outstanding debt. If consumers charge their credit cards to the limit, the credit-to-debt ratio is high. Maintaining low to no balance on credit card accounts can help lower the credit to debt ratio, and help improve a credit rating.

Conclusion

• Credit bureaus maintain information on consumers, but the consumers dictate the information in the report. For example, making credit card and other loan payments on time and as agreed will positively impact a credit rating, while not paying the loans will negatively impact the rating. Consumers can monitor the information on their credit report to check for inaccuracies; each consumer has a right to dispute inaccurate or outdated information.