Article

Credit Score Factors

Purpose: Describe the factors used in the calculation of credit scores.

From Kiplingers.com 10/2018

Credit score calculations are complex. All the information in your credit report is analyzed by a mathematical algorithm and distilled down to one number that predicts your creditworthiness.
Lenders use credit scores and loan or credit card application information to make decisions about granting credit and how much interest to charge.

The most important thing for you to know are the six primary pieces of information from your credit report that will determine your credit scores.

Payment History

Paying your bills on time every month is the most important thing you can do to get or maintain good credit scores.
In most credit scoring models, payment history counts for about 30% to 35% of your score, so pay at least the minimum payment due on time every month.
Late payments, accounts in collections, foreclosures and short sales will have a negative impact on your scores.

Credit Utilization

Your credit utilization ratio is the second most important factor.
Your credit utilization rate, sometimes called your credit utilization ratio, is the amount of revolving credit you're currently using divided by the total amount of revolving credit you have available. In other words, it's how much you currently owe divided by your credit limit.
It is generally expressed as a percent.
- For example, if you have a total of $10,000 in credit available on two credit cards, and a balance of $5,000 on one, your credit utilization rate is 50% - you're using half of the total credit you have available.
You can calculate an overall credit utilization rate as well as a rate for each of your credit accounts (called your per-card).
The credit utilization ratio is how much you are spending on your revolving credit accounts in relation to your credit limits.
Lenders consider it a sign of risk if your credit utilization ratio is above 30%.
Put simply, if your credit limits on all your revolving accounts add up to $3,000, keep your balance owed below $900.

Inquiries

A hard inquiry is posted to your credit file when you apply for credit.
Inquires have an impact on your credit scores for a short amount of time.
The best approach to manage inquiries is to only apply for the credit you truly need.

Type, Number, and Age of Credit Accounts

The best credit scores are generated from a mix of types of credit.
This means a mix of revolving credit lines, like credit cards, and installment loans, such as auto and mortgage loans.
Also, long credit history that shows you have had credit accounts open for a number of years is best.

Overall Debt

The amount of debt you are carrying across all your accounts in comparison to your income, called your debt-to-income ratio. is something lenders will sometimes look at in conjunction with your credit reports and credit scores for certain types of loans, such as mortgage loans.
Your debt-to-income ratio (DTI) compares the total amount you owe every month to the total amount you earn.
Lenders may consider your debt-to-income ratio in tandem with credit reports and credit scores when weighing credit applications.
To calculate your DTI, divide your total recurring monthly debt (such as credit card payments, mortgage, and auto loan) by your gross monthly income (the total amount you make each month before taxes, withholdings, and expenses).
- For example, if your total monthly debt is $3,000, and your gross monthly income is $6,000, you would divide 3,000 by 6,000 to get .5 or 50%.

In general, the less debt the better.

Negative Public Record Information

Public record information, such as a bankruptcy, typically has a very negative impact on credit scores.
But the good news is that the types of public record information included on your credit report has changed.
- As of July I, 2017, most tax liens and nearly all civil judgments have been removed from consumers' credit reports and will no longer be included.

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