What Determines Your Credit Score

What Determines Your Credit Score background

There are five factors that determine your credit score, based on your credit profile. Each has a different weight which determines your score. This score will range from 300 to 850.

Your overall credit profile and score is a snapshot of the most recent 7 years of credit activity or the last 84 consecutive months of data reported to the credit bureaus by your creditors. For cases like bankruptcies the data may be reported for up to 10 years after the debt has been discharged.

Payment History has the largest weight and therefore the largest impact on your credit score. This accounts for 35% of your total score, making timely payments essential to good credit. Payments that become delinquent by 30 days or more will generally be reported to the credit bureau and can have a significant impact on your score. Older delinquencies have less impact on your score than newer ones.

Amounts Owed is commonly referred to as the utilization ratio and accounts for 30% of your credit score. This ratio is calculated by taking your credit limit and dividing it by the credit balance. For example if you have a credit limit of $10,000 and there is a balance of $8,000, you have an 80% utilization ratio on that card. Those with the best credit have a total utilization ratio at 30% or lower.

Length of Credit History looks at the age of your accounts. For this reason keeping older accounts open can be a benefit. If you keep a card open but never use it, the company will generally close the account. In this calculation the scoring model will look at the oldest and newest accounts along with the average age of all your accounts.

New Credit impacts your score and opening several new accounts over a short period of time can result in a credit score decline. Calculated into this figure is any new inquiries made over the previous 12 months. One or two applications or credit inquiries will not hurt your score but several made in a 90 day period of time, will. The inquiries remain on your report for 2 years, but only impact your score for 12 months. When applying for car loans or home loans, apply within a two week period, to reduce any negative impact on your score. FICO® realizes that many consumers’ comparison shop and therefore applications for the same product over a short period of time, are bundled together for scoring purposes.

Types of Credit Used is the last factor. This evaluates your loans versus lines of credit in other words installment loans versus credit cards. It also takes into account mortgages, car loans, retail store accounts and national credit cards. You want a mix of different kinds of credit for the best score.

You can obtain a free copy of your credit report from each of the three bureaus once every 12 months, by going to www.annualcreditreport.com. This website does not require you to sign up for a service and only provides a free report. You can purchase your credit score from the site. Many credit card companies now offer a free credit score with your monthly statement so check that before buying a score. It is important to note that the score you get from various agencies will differ. They may use different scoring companies or different versions of the FICO® score.

Our consultants at Strategic Consulting can answer your questions about your credit report and can help you evaluate your debt to determine the best course of action for becoming debt free.

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