How Is Your Credit Score Determined?
October 13, 2008
Your credit score is like a pie, cut into slices. Taken together, a number of factors influences the size and taste of the pie - standing alone, each factor is incomplete.
There are many factors that determine your credit score. Here are the basics.
Your payment history is worth 35% of your score. That makes it the most important part. When you pay your debts on time and pay them in full this has a positive impact on your credit score. Late payments are evaluated on how long it took you to pay. Whether they are 30, 60, or 90 days late, each has a different impact on your score. Default payments are the most negative.
They also take into consideration the type of payment. Mortgage payments are given the most weight. Even one late mortgage payment in a one year period can lead to higher interest rates on a loan inquiry.
The next item used to determine your credit score is debt to income ratio. It is worth 30% of your credit score. Debt to income ratio is sometimes called debt utilization. It is the percentage of debt you owe versus the total amount of your credit lines. It’s good to keep your debt to income ratio below 50%. It’s best to keep it below 30% for a higher credit score. If you can keep your debt to income ratio low, the credit bureaus will interpret this to mean you are responsible with your debts and reward you with a high score.
Your credit history has a 15% impact on your credit score. Long standing accounts will help keep your score high. Newly opened accounts can bring your score down.
What kind of credit you have has a 10% impact. Creditors like to see a well rounded consumer. They like to see someone that has car loans, a mortgage, a few credit cards and maybe a gas card and local department store card. This signals that you are balanced and responsible with your money.
Credit inquires make up the remaining 10% of your credit score. You don’t want to have too many credit inquires, they stay on your credit report for a year. If you want to get a mortgage or car loan, it’s best to shop for them within a one month period, then they will be grouped together and only counted as one inquiry.
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