A Breakdown of
How Credit Scores are Calculated
Understanding credit report score. Learn how credit scores are calculated and what credit factors influence it.
There are five key credit factors that make up your credit report score and each one has a different level of impact on yours. What are these factors?
Here is a quick credit score breakdown which show you how credit scores are calculated...
- Payment History - 35%
- Amounts Still Owed - 30%
- Time on Bureau - 15%
- Amount of New Credit - 10%
- Types of Credit - 10%
If you haven't done so already, get your Free Credit Score! Once you've got your score and report, we can take a look at why your score is what it is and how to raise it.
Understanding Credit Report Score
Let's take a closer look at each one of these key credit factors to see how they impact your credit score...
Your payment history accounts for the largest percentage of your credit score breakdown at 35% and is all about what you've paid, or not paid, and how you have paid in the past.
- Payment history for specific types of credit (mortgage, auto loan, credit cards, etc.). Slow paying your home loan will hurt more than slow paying a credit card.
- Delinquencies and how long those delinquencies have been. 90 days late is worse than 30 days late.
- Accounts that go to collections. Usually happens after the account has gone 90 days delinquent or more.
- Accounts that are charged off. The creditor has basically given up on collecting and the account is charged off as a loss.
- Public records. Bankruptcies, judgments, tax liens, etc.
- Time since account has been delinquent. If accounts are currently delinquent, this will impact your credit report score much more than delinquencies from 2 years ago.
- Total number of past due accounts, public records, collections, charge offs, etc.
- On a positive note, how many accounts have been paid on time and over what period of time.
Amounts Owed on Accounts
This is an often overlooked credit factor for people with better credit and it's key to understanding a credit report score. Amounts owed on accounts makes up 30% of your credit score breakdown.
I mention better credit customers here, because you may have an excellent pay history and never missed a payment, but if your credit cards are close to maxed out, your score will suffer.
The credit scoring system looks at maxed out credit cards as a "financial struggle" to pay your bills. The higher your balances, the closer you are to bankruptcy...
- Amount owed.
- What types of accounts you owe money on.
- How many accounts have balances.
- Credit card - Percentage of balance to the card limit.
- Installment loans - Percentage of balance to original loan amount.
Time on Bureau
Time on bureau can also be considered length of credit history and makes up 15% of your score. The longer your time on bureau the better.
Someone with a 700 credit score and 2 years on the bureau will not be considered as credit worthy as someone with the same 700 credit score, but 10 years on the bureau.
- When credit was very first established.
- Length of time since new accounts opened (by specific type of account).
- Time since account activity.
Important!!! Be very careful closing out your accounts. If all your accounts were closed and there were no activity on your credit bureau for 6 months, your score would go to ZERO! Even with a 20 year credit history!
New Credit and Credit Inquiries
Not a huge percentage of your credit score breakdown at 10%, but important to understanding your credit report score. New credit is pretty straightforward and is a look at how much new credit you have, what types of credit you've gotten and how long it's been since you got the credit.
10 credit cards in 10 weeks will not do your credit score any favors, but a new auto loan and new credit card in a short period of time should not do much.
Credit inquiries always get a lot of questions and here is a simple explanation. Let's say you are shopping for a car...The first inquiry will cost you between 3 and 5 points, but all others related to buying a car within a 14 day period will not cost you any points.
Using the scenario above, I've been told that you can have credit inquiries up to 30 days that do not affect your score if you end up purchasing a car within that 30 day window.
Types of Credit
The types of credit you have play a small but important role in determining your score. At only 10% of your credit score breakdown, it may seem small, but if you want to learn how to get good credit, then it's important to know.
In order to satisfy the powers that be - the Credit Bureaus - you'll want a good mix of credit, but not too much of it at any one time. The best mix I've found is usually:
- 2-3 open and current credit cards.
- 1 open and current mortgage (a past, well paid and paid off mortgage seems to work well also).
- 1 open and current auto loan (a past, well paid and paid off auto loan seems to work well also).
Of course, past paid accounts (the more the better) help your credit depth and will boost your score, but the above was a quick example of what currently active accounts seem to be the best mix.
How’s your credit score? 0-600 Poor, 601-680 Fair, 700-774 Good, 775+ Excellent. Find out your Score now FREE!
Now that you've got understanding your credit report score mastered and how credit scores are calculated, why don't you head over to my FICO Score page and see how all these credit factors tie into lenders credit tiers and what you will qualify for.
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