The formulas for calculating credit scores are complex and are technically trade secrets of the credit companies that develop them. In developing credit scores, the companies that build the credit scoring models consider a wide variety of factors drawn from credit records. Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount or demographic factors like gender, race, nationality or marital status.
Although hundreds of factors may be created from credit records, those used in credit scoring models are the ones proven statistically to be the most valid predictors of future credit performance. Different portions of your credit file are given different weights. The factors and the weights assigned to each one can vary across evaluators and their different models, but the factors generally fall into four broad areas: payment history, consumer indebtedness, length of credit history, and the acquisition of new credit.
A credit score takes into consideration all these categories and the factors within the category, not just one or two. No one piece of information or factor will determine an individuals credit score. There is a general level of meaning to these factors but the importance of any factor depends on the overall information in an individual’s credit report. A credit score will be determined by both positive and negative information in a credit report. Late payments on credit accounts will lower a score, but having a good record of making payments on time will raise a credit score.
An individual’s payment history is the most important factor in determining your credit score. Missing payments or making payments late is a sure fire way to drop the value of a score quickly. Approximately 35% of the credit score is based on this category. Payment history includes payment information on many types of accounts. This may include credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. Payment history also includes public records and collection items such as reports of bankruptcies, judgments, suits, liens, wage attachments, and collection items.
The credit score model assesses the details on late or missed payments in an individuals payment history evaluate specific details such as how late they were, how much was owed, how recently they occurred, and how many there are. The number of late payments measures the number of accounts that were late and how many times late payments occurred per account. Closing a delinquent account or an account on which previously missed payments had occurred does not make the late payment disappear from a credit report and will still impact the credit score.
Approximately 30% of a credit score is comprised of an individual’s current level of indebtedness. Owing a great deal of money on a large number of accounts can indicate that a person is overextended. The measurement of being overextended gets slightly more technical by determining how much is too much for a given credit profile.
One key measure is to look at the current balances on existing debt compared to high credit and available credit. In addition to the overall amount owed, the score considers the amount an indivdual owes on specific types of accounts, such as credit cards and installment loans.
The next category covers about 15% of total credit score and this is the time credit has been in use. In general, a longer a credit history runs the greater the positive impact on the credit score. However, even people with short credit histories may get high scores, depending on how the rest of the credit report looks. The credit score will take into account how long specific credit accounts have been established, the age of the oldest account, an average age of all the accounts as well as how long it has been since the various accounts have been active.
Approximately 10% of the credit score is based on the evaluation of new credit opened and credit inquiries. The credit score looks at how many new accounts have been opened and the type of account, for example, how many new credit accounts are credit cards or perhaps a home loan. The score reflects how long it has been since an individual opened a new credit account. How many inquiries have been made into an individuals credit record or recent requests for credit as designated by the inquiries to the credit reporting agencies is also measured.
The final component of a credit score is the mix of credit accounts. The score will consider the different types of retail credit cards, other store cards and retail accounts, installment loans, revolving lines of credit, finance company accounts and mortgage loans open and used over time in the credit report. The score considers what kinds of credit accounts an individual has, and how many of each. Though the type of credit used in the past is factored in the credit score it is given the least attention.
No one single factor will control a credit score. How each of these factors interact to create a credit score from the credit report is the most important concept to focus on, not just each individual one. Your score only looks at information in your credit report, poor results or positive results are calculated based solely on the credit report data. Most credit scores range from 300 to 900, with the majority of people in the 550 to 800 range. The first step to improving a credit score is to find out what your credit score is. Once an individual’s credit score is obtained, then a consumer can take steps toward improving the data in the credit report that is used to determine the credit score.