5 Factors That Determine Your Credit Score
1. Payment History – 35%
2. Amount of Debt – 30%
3. Length of Credit History – 15%
4. Credit Inquiries – 10%
5. Types of Credit – 10%
Many borrowers ask how their credit score is calculated. Your credit scores are based on the information from your credit reports (from Experian, Equifax, TransUnion), which shows your history of borrowing money, making payments, opening lines of credit and paying your bills. Here are the five key factors that matter, according to myFICO, which is a division of Fair Isaac Corporation, the company that invented credit scoring.
Payment history (this makes up 35% of your score points): The scoring model is trying to predict whether or not you’re going to pay your bills on time, and the best way to do this is by looking at how well you’ve paid them in the past. Late or missed payments, repossessions, tax liens, collections, judgements, foreclosures, settlements, tax liens, bankruptcies, judgments, collections, and defaults can all affect your credit score—and the more recent and the more common they are, the more your score will be harmed.
Amount of debt (30%): The amount of debt you owe can also significantly impact your credit scores, even if you pay them on time. Furthermore, the most important metric in this category is your “credit utilization percentage.” It measures the ratio between your credit card balances and your credit card credit limits. The more of your credit limits that are being used, the lower your scores will be. Lastly, an important factor in this segment is the number of accounts on your credit report that has a balance. The more accounts you have in use, the more problems for your credit scores.
Length of credit history (15%): Do you know how old your oldest credit card is? If not, you might do a quick audit as this is a key factor in achieving higher credit scores. Having a long history helps your credit scores because it shows that you’ve managed credit for a longer period, rather than for a shorter period of time. This also explains why you might not be able to break into the 800+ club even though your credit is stellar. This is why it’s never a good idea to open a large number of accounts in a short period of time, because it will lead to a much younger average age.
Credit inquiries (10%): Whenever you apply for a loan or a new credit card and your credit report/s and credit score/s are pulled, an inquiry or inquiries are added to your credit reports. An inquiry is simply a record of who pulled your credit report, and when. If you have too many recent inquiries, this raises a red flag in credit scoring models, because it could mean you’re attempting to take on a lot of debt in a short period of time. Though inquiries can stay on your credit reports for two years, only those made within the last year are considered when calculating your credit score. And, credit scoring models are smart enough to distinguish between multiple inquiries caused by you shopping around for the best deal and multiple inquiries caused by you taking on too many accounts in a short period of time.
Types of credit (10%): Having different kinds of accounts can help your credit score because it shows you can manage a mixture of credit types. There are a variety of types of credit: revolving credit (credit cards), installment credit (auto loans and mortgages), and open credit (anything you have to pay in full each month, like your utility bills). Installment credit is paid back with regularly scheduled payments, such as the fixed monthly payments you make for a mortgage or car loan. Revolving credit involves open-ended payments, and any money you repay is available to be borrowed again. Credit cards and home equity lines of credit are examples of revolving credit. The well-known American Express Green card, which is a charge card rather than a credit card, is another example of an open credit account.
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