The Five Factors That Determine Your Credit Score
A credit score is not based on just one thing. In fact, these scores are often made up of years of credit history. Whatever you do, financially speaking, could have an impact on your credit score. It is up to you to make good credit decisions to ensure your credit score is where you want it to be – as high as possible. Keeping this in mind, you may be wondering what makes up that score. How does the credit bureau determine it?
FICO scores are calculated from a variety of different bits of information collected about you by the three national credit bureaus. Those credit bureaus are Experian, Equifax, and TransUnion. You have the right to obtain a free copy of your credit report from each one of these credit bureaus each year. That is the best way to see what is creating your FICO number.
Your credit score will differ from one bureau to the next, but your FICO score is one of the best indications of your credit. Take a look at the breakdown that FICO provides that show just how important various types of actions affect your score.
- 35 percent of the score comes from payment history. Do you make payments on time? Do you make payments late? Do you skip payments? All of these factors play a role in this process. This is the largest factor affecting what your credit score is and it plays the biggest role in whether a lender will consider your application or not.
- 30 percent of the score comes from amounts owed. How much debt do you have? This will also include the amount that you owe on specific types of accounts (with high credit card balances affecting your score more negatively than a high debt from a mortgage.) The number of accounts you have with balances also plays a role. In addition, how much of the credit line is used up of your revolving credit matters and the amount you still owe on installment loans plays a role.
- 15 percent is from the length of your credit history. Have you ever been told not to close off the old accounts you have even if you do not owe anything on those accounts or use them? That is because closing old accounts can harm your credit score. You want to have a long history of using credit because it shows you are not new and that may mean you are less likely to abuse credit. Keep older accounts open, especially if you had a good payment history with those accounts.
- 10 percent is dependent on the new credit you have. How many new accounts do you have (did you open those accounts in the same short period of time?) How many recent credit inquiries have you had? How long has it been since you had a credit inquiry or opened an account? In short, if you open too many accounts in a short period, this indicates that you may be desperate for credit. Lenders do not want to see numerous accounts open at once or within the same six-month period.
- 10 percent is the types of credit used. To have a high score, use numerous types of credit. This shows that you can make good financial decisions. The number of various types of accounts, such as credit cards, installment loans, consumer financing accounts and retail accounts plays a role. If you only have credit cards, for example, you may be less experienced than someone with other loans may.
Your credit score does not come from just one or two of these areas. Rather, it comes from all of these areas factored together.
Income Isn’t the Deciding Factor
One thing you will notice is that income is not something that plays a role in this equation. It does not matter if you have a high income. Even those who have a low income can have great credit. Rather than look at income, consider how you use credit. Lenders will not give you a loan that you cannot afford to pay, according to their standards. However, your credit score is an important factor.
Spending Habits and Credit Scores
What do your spending habits say about the type of credit score you have? Look at a few examples of how this can relate.
- Those who tend to spend more, tend to have a lower credit score. The reason is that these people tend to maintain a balance on their credit cards month to month, buying more than they can repay. They are more likely to have more types of accounts, too, since they often need a higher credit limit. The more you spend the more debt you create.
- Those who have a good credit score tend to spend moderately. You might buy something that you really want, but you work hard to pay it off within a few months. You may still carry a balance from month to month, but you pay your bills on time and you do not go on large shopping sprees too often.
- Those with great credit do not buy what they cannot afford. If they do use credit cards for purchases, they ensure they pay off the balance in full each month. They stay on top of all payments and keep monthly charges to a minimal overall.
Where do you fall in this line? Do you have a good credit score? Do you have a poor credit score? In either case, you can and should take steps to improve your score. You can do this by simply making good credit decisions with each purchase you make. Know what your limits are and set goals for yourself.
If you are living off credit, chances are good your score is low. However, breaking free and working hard to pay down your debt can allow it to rise. By looking at the way that you spend, you can often find ways to boost your score.