rating stars wrong

How are you rating the songs?

What happens if you drag the stars in the rating column?

Drag stars from where?

With the track selected, click in the rating column, then start dragging left or right.
(the stars will appear up to where your mouse is when you click)

In your iTunes folder is a file called "iTunes Music Library.xml". It's a text file you can open with a text editor or an RSS reader. The song ratings are defined in lines that look like this:

<key>Rating</key><integer>80</integer>

Divide the number between the <integer> tags by 20 to get the number of stars your song should have — in this case, 80/20 = 4 stars. Do you only have rating values of 0, 40, and 80 (zero stars, **, and **) in that file, or do 20, 60, and 100 (*, *, and ***) appear for some songs as well?

I have two of those text files could this be the
problem?

Well, you should have one called "iTunes Music Library.xml", and another called "iTunes Library" that's a different type of file. That's normal.

I have never rated songs before so I have no ratings
do I need to rate some to test this theory. As you
can tell I dont know much about this type of thing

I'd suggest rating a few songs — try to rate them three stars (or whatever iTunes won't let you do) with the control-click menu. Then open up "iTunes Music Library.xml" with a text editor, and search for the songs you rated. See if they're rated 60 (what it should be for three stars) or something else, and let us know what you find. (Be careful not to make changes to the text file! That might annoy iTunes.)

iTunes doesn't use or really care about the .xml file. It is created by iTunes for other apps.