Hands on computer keyboard holding a credit card.

Understanding Credit Scores

Can you tell me how your credit score is calculated? A credit score is based on the information provided in your credit report and it indicates how likely you are to pay your bills.  The score typically ranges from 350-850.  The higher the score, the better. That’s it you say?  Why yes it is.  Then why is it so hard to figure out what your score is at any given time?
 

Part of the problem is that there are multiple types of credit scores.  There’s the FICO Score, Vantage Score and even scores geared toward specific purchases such as an automobile scoring model.  But for the most part, scores all look at the basic same things.  Let’s break down the FICO Scoring Model as that seems to be one of the most popular:  

 

Your payment history is the biggest and most important factor of your score at 35%.  It includes how you pay on all of your credit accounts- credit card, retail accounts, installment loans, etc.   It also takes into consideration the presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).   How many accounts are paid as agreed, how many are past due and how long the item is past due are factors as well. 

The next largest category at 30% is Amounts Owed.  Not only are we talking overall, but per account as well.  Here is an example of what I am talking about:  You have 5 credit cards all with a credit limit of $10,000 for a total of $50,000.  It will look better if you owe $2000 on each card versus owing $10,000 just on one card even though the total owed is the same. 

Length of Credit History is 15% and this factors in how long an account has been opened as well as how long it has been since you have had activity on accounts. 

The Types of Score Used can compromise your score up to 10%.  It is best if you have a variety of debt reflected on your credit score.  Types of debt include: credit cards, retail accounts, installment loans, mortgages and consumer finance accounts.  It’s easier on your credit score if you have a mortgage, a car payment and 3 credit cards than it is if your debt is entirely credit card debt.

Lastly New Credit may impact your score up to 10%.  You know when you are shopping at the mall and each and every store asks you to open a credit card to save 15%?  Well this is where it will hit you so please politely decline.   This category also looks at time since you had a hard inquiry as well as re-establishment of positive history following past payment problems. 

Your credit score captures all your credit information at any moment in time, but there is more to consider.


First of all, it is based on the information contained in your credit report and not all creditors report to all credit bureaus.  This is why your score may vary between the three major credit bureaus.  Second, creditors may report to the bureaus at different times so your score can change from day to day.  Third, scores factor in both positive and negative information. 

This is just the tip of the iceberg when it comes to understanding credit scores so make sure you come back to read my future blogs as we continue to unlock the secret to credit scores!  

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