What affects my credit score?
Here are the key factors that affect your credit scores displayed in a pie graph below.
Payment History 35%
Lenders want to know how you have handled your accounts in the past. Such accounts as credit cards, retail store accounts, installment loans, finance company accounts and mortgage loans.
The things lenders look for specifically are:
- How late your payments were 30-60-90 days. *According to Fair Isaac. "A 30 day late payment made just a month ago will count more than a 90 day late payment from five years ago"
- How much was owed at the time of delinquency and are there outstanding balances.
- Collection items and Public records. Such as judgments, bankruptcies, suits,liens and wage attachments. Most of these are considered quite serious, although older items will affect the score less than the most recent ones.
- The amount of negative items as compared to your total amount of available credit. For instance 5 accounts showing 3 late payments is much worse than 10 accounts showing 4 late payments. One of the biggest sub factors is how many accounts show no late payments. If you have a number of accounts and most show no late payments, your over all credit score will increase substantially.
Your payment history is just one piece of the score calculation, although it can be very important.
Amount Owed 30%
The lenders ask themselves can the borrower pay me and still afford to pay their other bills?
While owing a lot of money on many accounts might indicate that you are overextended, your FICO score will not necessarily be harmed by large outstanding amounts. Paying off your credit cards in full every month does not mean that they won't show a balance on your report. What is more important is how many accounts have balances and how much of the total credit line is being used on credit cards and other "revolving credit" accounts. In an attempt to improve their credit scores, people sometimes make the mistake of closing down credit cards accounts where they have small balances and consolidating their debt under one credit card. If you have a credit card with a very small balance and no late pays. Even though the balance is low, this still looks very good as it shows that you are able to manage your credit responsibly and this reflects positively on your credit score. If you should close the accounts and consolidate all the debt on one card that you nearly max out, this can actually worsen your score since the percentage of your lines of credit that is still owed would actually go up.
Credit History Length 15%
If you are just trying to establish a credit record, you have few options to improve your score, since how long your credit accounts have been established is what counts. Most often, the longer the credit history the better your credit score can be. However this only makes up 15% of your overall score. So even young people, students and others with short histories can still have high credit scores as long as the other factors show positive results. Parents should take note that establishing a credit record for your children before they go out on their own could give them a leg up when they apply for credit later.
Types of Credit 10%
This factor takes into account your mix of installment loans, mortgages, retail accounts, credit cards and finance company accounts. Fair Isaac, however, is a little vague about how it weights your mix of account types. It does not indicate that this factor may be given less weight if the company has full information about your other four factors. Its not a good idea to try and open different types of accounts just to try and make this factor better. It will likely reduce your score in other areas. You should never open accounts you don't intend to use anyway, so when you are asked to open an account to get that stuffed animal remember how it can affect your score.
When the credit bureaus deliver your FICO score to your lender, the score is also accompanied by what are called "reason codes." These explain what factors lowered you score. For example, one reason is that your code "number of accounts with delinquency." For you, the reason codes could be very important, since they could indicate the best ways to improve your score.
Acquiring new credit 10%
Even though this category makes up only about 10% of the total score, applying for too much new credit is probably one of the easiest ways for people to inadvertently harm their credit score. Just look at how many credit card offers you get via the Internet and in the mail. Here, the FICO model looks at how many new accounts you have established, how long it has been since you opened a new account and how many recent requests for your credit have been made by credit reporting agencies. Fair Isaac says that if you request your credit report from one of the agencies this does not count since it is a "consumer-initiated inquiry," Until recently, your score would have gone down if you made a number of applications for credit cards or mortgages within a short period of time-even if all you were doing was shopping around for the lowest rate or best overall deal. Now, Fair Isaac claims that they lump together inquiries made within a short period of time as one inquiry. So if you are shopping around, make your inquiries all within a few days if you can. (Note: this only applies to auto or mortgage loan inquiries.)