Concept

• The credit rating system gives lenders a way to determine the likelihood of whether a borrower will pay back the loan. Television personality Dr. Phil says the best predictor of future behavior is past behavior. Credit rating systems subscribe to a similar philosophy. The FICO scoring system is the most widely used credit-scoring model, and payment history is 35 percent of your FICO score. If you pay your bills on time, your FICO score will be higher than if you consistently make late payments or default on a loan altogether.
  
  

Credit-Scoring Systems

• Banks, finance companies, credit card issuers, mortgage lenders and small businesses use credit-scoring systems. Ever since the 1980s, lenders have been able to buy and view your credit history from the credit-reporting agencies. The agencies do not make credit decisions, they merely collect and record information. Besides your credit history, your non-credit-related bills, collections, foreclosures and bankruptcies are included on your credit report.
  
  

A Positive Report

• It is to your benefit to have positive information on your credit report. If you pay your bills on time, your credit report reflects that. It also tells lenders how long you've had credit---the longer, the better---and whether you use all of your available credit. It's best to only use about 30 to 35 percent of your available credit or less, according to Bankrate.com. Congress, in 2003, recognized the need for consumers to be able to view their credit reports and amended the Fair Credit Reporting Act to allow people to obtain a free copy of their credit report once a year from the big three credit-reporting agencies---Experian, Equifax and TransUnion. You can get your report through AnnualCreditReport.com View your credit report to make sure the information on it is accurate. Contact the credit-reporting agency in writing if you discover inaccurate entries.
  
  

Removes Prejudices

• The credit-reporting system benefits consumers by removing prejudices. Under the Equal Credit Opportunity Act, your credit report cannot include information about your race, national origin, ethnicity, sex, religion or marital status. Using a scoring model, such as FICO, everyone is on a level playing field, judged by the following categories: payment history, account balances, age of accounts, types of credit and how much new credit you have recently applied for. If a lender rejects your application for a loan, the lender must give you a specific written reason why you were denied or notify you that you can request a written explanation.