How is Your Credit Score Determined?

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Your credit score is one of the most important numbers in your daily life. Credit scores are used for loan approvals, determining interest and insurance rates, when screening for employment and rental applications, and even determining eligibility for cell phone contracts. But not everyone knows how credit scores are determined – and this is important…

Your credit score is one of the most important numbers in your daily life. Credit scores are used for loan approvals, determining interest and insurance rates, when screening for employment and rental applications, and even determining eligibility for cell phone contracts. But not everyone knows how credit scores are determined – and this is important to know.

One place to get this answer is to the myFICO website, which is a division of Fair Isaac, the company that created the FICO credit score. The FICO credit score is considered the benchmark credit score, as over 90% of banks use FICO credit scores when pulling a customer’s credit score. You can get a copy Free FICO Credit Score from each of the credit bureaus.

How Your Credit Score is Calculated

Your credit score is comprised of many different factors from your credit report, each of which has a different weight. The better your credit history, the better your credit score.

The following chart breaks down the FICO credit score, which is one of the more popular credit scoring models used by lenders.

This chart breaks down the components of your FICO score.

How is Your Credit Score Determined

Payment History – 35%

Your payment history is the largest component of your credit score. Lenders want to know your past performance for paying off your loans. Lenders are interested in the type of loan you had, such as a credit card, mortgage, installment loan (a loan with a fixed number of payments, like a car payment), consumer finance account (generally considered a lower tier type of loan made by companies who generally lend to higher risk individuals), etc. Lenders are particularly interested in these other factors as well:

  • Number of accounts fully paid per agreement with the lenders.
  • Bankruptcies, judgments, lawsuits, liens, wage garnishments, delinquencies, bills that have gone into collection, or other negative signs that you may be a credit risk.
  • How long overdue you were on your payments.
  • How much you were past due on your bills or collections.
  • How recent these delinquencies or negative marks occurred.
  • Number of past due items on file.

Amounts Owed – 30%

In addition to the types of loans and your payment history, lenders are concerned with how much money you owe. Even if you have a perfect credit record, there is a limit at which lenders will probably not lend you any more money – simply because your debt to income ratio doesn’t support lending any more money to you. These factors are considered for your FICO score:

  • Amount owed on all accounts
  • Amount owed on specific types of accounts (secured vs. unsecured, etc.)
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits)
  • Proportion of installment loan amounts still owed (remaining balance vs. original loan amount)
  • Lack of a specific type of balance, in some cases

Length of Credit History – 15%

Lenders prefer lending to people who have consistently shown they can handle credit in the past. Chances are they will be able to handle making payments in the future. Some of the factors that make up your FICO score are:

  • Time since all accounts opened
  • Time since account opened, by specific type of account
  • Time since account activity

New Credit – 10%

New credit refers to how much credit you have taken out recently. Lenders may become concerned if you have recently applied for thousands of dollars in loans and continue to request more lines of credit.

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used – 10%

There are many types of credit on your report.  The most common types of credit include credit cards, retail credit accounts, mortgages, installment loans, and consumer finance accounts.

In addition to the types of credit, your FICO score will also encompass the number of each type of credit, how often they are used, and any recent information for them.

Additional factors affecting your credit scores:

It is important to remember your FICO score takes all of these factors into account, not just some of them. Your credit score will take into account both the positive and the negative information from your credit report. However, it is possible to raise your FICO credit score over time by establishing a good track record.

Note: If you have only recently established credit, your weighting may be slightly different because you have no established credit history.

Lenders look at more than just your FICO score. Your FICO score is only comprised from information found within your credit report. Lenders, however, look at many factors when making a lending decision, including income, current employment situation, type of credit being applied for, and more.

Keep your credit score high. Your credit score can have a big effect on your life. Having a good credit score is important.

Related Post: How to Improve Your Credit Score – 7 Easy Steps to a Better Credit Score

How Do Negative Items Impact Your Credit Report?

Your credit report and credit score should be a couple of your most prized financial assets. A solid credit history without any negative marks can save you hundreds of thousands of dollars in interest over your lifetime. Likewise, a few negative marks on your report can drop your score which in turn raises the cost of financing across all products like credit cards and home mortgages. With enough negative items on your report you can even be denied a loan completely.

Have you looked through your credit report online lately?

As important as your credit report is, sometimes life happens and we slip up. It might be a little ding on your report from a late payment or something more serious like several missed payments and an account that has been charged off. These mistakes can be costly in the long run.

Considering how important your credit report is to your ability to acquire loans in the future, it is important to know how long these negative items will stay on your credit report. Will your payment that was two days late end up ruining your credit history forever? Will the account that has been charged off keep you from becoming a homeowner? Let’s find out.

How Long Do Negative Items Stay on Credit Reports?

Let’s start with the bad news first. Most of the negative items on your credit report will be on the report for seven years from when they first were reported.

That means a negative item that is first reported today will be on your credit report for seven years.

What types of negative items are there for your credit report? All are varying levels of your inability to pay your debts on time:

  • Late payments (you paid, just not on time)
  • Short sales (you repaid some of the loan, but the bank had to write off some of what you owed)
  • Foreclosures (the bank writes off the full unpaid balance of the mortgage)
  • Bankruptcies (all of your creditors wrote off all of your debt; these last seven years if Chapter 13 and 10 years if Chapter 7)
  • Collections (a creditor sold off your debt to another company that tried to get you to pay)

All of these items, except in limited circumstances, will be on your report for seven years. This is why the best credit repair is prevention!

The Impact of Negative Items on Credit Report Over Time

While the negative marks on your credit history will stay there for seven years, they won’t pull down your credit score the exact same amount every single year.

A late payment today is significantly worse for your credit history and credit score than one from six years ago.

Additionally, the impact of negative items on your credit score isn’t as simple as plugging in the number of negative marks into a calculator and deducting points. Other positive and negative factors on your report can change how much or little your score is impacted by a negative item.

In short, having one slip up with a late payment won’t destroy your credit. Having other positive factors can mitigate some of the damage away. Likewise, piling up negative item after negative item can show creditors you cannot handle your financial obligations and really damage your score.

Related Posts:
What is a credit freeze?
Hard Credit Check vs. Soft Credit Check
Preventing Identity Theft for Your Children
What Credit Score Do You Need to Refinance a Mortgage?
The Debt Snowball Method for Reducing Debt
Can Authorized Users on Credit Cards Build Credit?
Buying a Car with Not-So-Great Credit
How Closing a Credit Card May Affect Your Credit Score

Have you found negative items affecting your credit score? What are some ways you made up for that disadvantage? Leave a comment!

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Kayla says

    My husband has a credit score of 784, I have a credit score of 663. We were recently offered a credit card from our bank with a $1700 limit. Currently neither of us has a credit card, though we do have established credit through student loans, and he is an authorized user on his parents target visa card. We do not need the credit card, but were told by some that having one would positively impact our credit scores, though I have also heard that they can negatively affect your score. We are wanting to take out a mortgage within the next 9 months and do want to ensure our scores are as high as possible. Would you recommend getting the card?

    • Ryan Guina says

      Kayla, there are a lot of factors which go into applying for a mortgage, including your credit score, credit history, income, debt to income ratio, how much you are financing, and more. It is very difficult for anyone to tell you exactly how getting a credit card will affect your score in regard to being able to get a mortgage. In general, getting a new credit card will give you a small hit on your credit score until you can show you are handling it well, and establish some history with it. Then you will likely gain the few points you lost back, and then your score should begin to climb. This is assuming you make all payments on time, don’t have a large limit on the card, and don’t spend the entire balance at once (credit utilization is how much of your available credit you are using). Your husband has a great credit score, so a credit card shouldn’t affect his score much in either direction. Your score could use some improvement before applying for a mortgage, so make sure that if you get a credit card, that it is in your name as well, and that it reports to the credit bureaus in your name so you can gain the benefits of increasing your credit score. Best of luck!

  2. Mary says

    Ryan –
    I am a landlord and have a tenant who is two months behind on rent, has not paid the water bill and has had her vehicle repossesed. The tenant has given us a check for one month’s rent, but it was returned due to insufficient funds.
    We have started the eviction process, but want to know how (if possible) to get the non-paid monthly rent to show up on her credit score.
    Thank you for any input that you can provide. Mary

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