Your credit score is a three-digit numbers calculated from information in your credit report. It summarizes your creditworthiness and your risk level. A higher credit score usually leads to more credit choices and better interest rates.
Yet, a lot of confusion surrounds how these numbers come about. First off, you have more than one credit score and they often differ between each national credit reporting agency. That’s because Transunion, Equifax, and Experian credit reports may include or exclude certain information or report it at different times.
Plus, credit scores are based on one of two scoring models: FICO or VantageScore. Each may place more or less emphasis on each credit factor when compared to the other scoring model. Even so, their basic considerations are similar in many ways.
Consequently, handling credit well always benefits you. If you pay close attention to the following major factors, it can help you improve your credit scores.
Factors Considered When Credit Score Calculated
Basically, all credit reporting agencies, or credit bureaus, consider the following factors. They are the most common denominators for predicting the likelihood you will pay your bills.
Payment History
Through FICO, your payment history accounts for 35% of your credit score. VantageScore mentions it is ‘extremely influential’.
Why? Your payment history is a record of how you’ve handled your credit so far, from a variety of sources. (If you don’t have your credit reports yet, get them at AnnualCreditReport.com and check for errors.)
Your credit accounts may include things such as your credit cards, lines of credit, store accounts, loans, and mortgages. For example, you may have two credit cards, a line of credit through your bank, and an auto and student loan. That’s five credit accounts, each with its’ own line on your credit reports.
So, what exact information is in your credit history? Basically, it is a very detailed account of whether you’ve paid on-time or had late or missed payments. If you haven’t made your payments as agreed, all credit reporting agencies rate the severity of the problem and adjust your credit score accordingly.
For instance, they will be interested in whether you had a late payment recently. They will also check how much you owe. Furthermore, they will check how often this happens.
Unfortunately, the credit agencies don’t offer an exact formula for calculating your credit scores. Nonetheless, missing payments often and owing a lot of money sends up red flags that will definitely lower your credit scores.
Moreover. the credit reporting agencies look at how many delinquent credit accounts you have compared to your total credit accounts. As an example, you could have 12 credit accounts, but half of them have had a late payment. In this case, your high ratio of delinquent to on-time payments will probably lower your credit scores.
Finally, any public record of bankruptcy, lien, or judgment increases risk and significantly lowers your credit scores. These records also stay on your credit reports for years.
As an example, Chapter 7 bankruptcies stay on for 10 years. Chapter 13 bankruptcies and civil judgements remain for 7 years and unpaid tax liens for 15 years.
Credit Utilization Ratio
Your credit utilization ratio compares your total available revolving credit (credit cards and lines of credit) against what you’ve used. FICO ranks it second in importance, at 30% of your credit score. VantageScore considers this factor ‘highly influential’. Either way, your credit history and credit utilization factor are the most influential in your credit scores.
Your credit utilization factor is important to creditors, because it shows them you have available credit, but use a reasonable amount of it responsibly. Basically, the credit reporting agencies want to see that you aren’t prone to use most or all of your credit, just because you have it. A high credit utilization ratio is a red flag, because you are more likely to default on your debts.
As an example, you may have a credit limit of $20,000 on two credit cards, but if you’ve charged $35,000 that could lower your credit scores. The compound interest on your cards would increase your indebtedness quickly. Plus, it would be very hard to repay such a big debt.
Experian suggests your credit utilization ratio should not exceed 30%. However, lower is definitely better.
If your ratio is too high you have several options. First, try to pay off your revolving credit balances one at a time. As you free up available credit, your ratio will decline. However, you need to pay your minimums on other debts as well.
Second, keep your credit accounts open, even if they have zero balances. They’re included in your available credit amount. You can also ask for a credit limit increase, even if you don’t intend on using it.
Finally, and this is mentioned with caution, you can open an additional credit account. However, doing so can have a negative effect due to the impact of credit inquiries. Too many in a short time can make it seem your trying to take on more credit than you can afford. (Read more under Credit Inquiries)
Length of Credit History
The longer you can demonstrate that you can handle credit well, the more likely you are to have good credit scores. As a result, FICO assigns 15% importance within your credit score. VantageScore considers this factor ‘highly influential’.
Consequently, older Americans tend to have higher credit scores. Nevertheless, younger borrowers can do many things to strengthen their credit history. For instance, Experian Boost is a free service that shares financial information and paid bills to the credit reporting agencies. UltraFICO also helps those with a short credit history to build it.
Additionally, Rental Kharma and RentTrack report monthly rents to the three credit bureaus. Recurring subscriptions and payments can also be reported through the free app, Altro.
Credit Inquiries & New Credit
FICO assigns 10% importance to the number of new accounts you open and any recent hard inquiries. VantageScore considers these ‘less influential’.
Nonetheless, you can’t choose which credit reporting agency or scoring model a lender may use. If it is FICO, applying for credit will negatively affect your credit scores if the creditor uses a hard credit inquiry. It temporarily lowers your credit score by up to 12 points and lenders pay attention to them. Multiple inquiries within a short time can make it seem you’re struggling to obtain credit, even if you’re just shopping around for the best rates.
However, not all credit inquiries cause your credit scores to drop. If the creditor uses a pre-approval process and a soft credit inquiry, your credit scores remain untouched. The process provides a potential lender with a general overview of your financial position, but not the details of your credit history. If they like what they see, they may offer you credit, even if they haven’t seen your entire credit report.
Consequently, you should choose creditors that use soft credit inquiries, when possible. If you must use one that uses a hard inquiry, only apply for new credit when absolutely necessary and when you have decent credit scores. If your credit scores are marginal, work to improve them and then apply. Otherwise, they could drop into an even lower credit range with even fewer credit options.
Credit Mix
FICO assigns 10% importance to this, but VantageScore consider it ‘highly influential’. Credit mix shows you can handle various forms of credit well.
Examples of credit forms include credit cards, lines of credit, retail accounts, loans, and mortgages. While you don’t have to use all these forms of credit, you should expand beyond credit cards if you want to improve your credit scores.
Fortunately, that’s often easy to do once you’ve handled your cards well. Lenders are usually eager to offer other credit products such as installment loans when you show them you’re responsible.
Bottom Line on Credit Score Calculations
Luckily, times have changed and you have credit options, even if your credit scores aren’t at their best. That’s not to say that you shouldn’t improve your credits scores whenever possible – you should. However, major banks using hard credit inquiries which lower your credit score aren’t your only option.
As an example, FlexMoney offers installment loans in Missouri. We operate remotely, do not charge hidden fees, and offer a quick process. Additionally, we use a pre-approval process and a soft credit inquiry. Our loan application does not affect your credit scores.
Furthermore, our credit building loans are available to most people, since our emphasis is on income, not credit. Consequently, even those with bad credit may qualify. Plus, they are often ideal for anyone looking for a low income installment loan. We’ve helped first-time borrowers, students, pensioners, and those with other steady forms of income paid by direct deposit.
FlexMoney loans are a modern alternative to the complications of mainstream lending. Borrow up to $2,000 with 12-months to repay. There is no need for appointments, proof of income, or office visits.
Apply today, skip the hassle, and enjoy the convenience of regular payments and a fixed interest rate. Our quick cash loans could be your perfect solution, particularly when others won’t help.