What factors are used to calculate credit scores?

Although credit scoring models were being developed as early at the 1950’s, their actual widespread use didn’t fully take effect until the early 1990’s. Fair Isaac Inc. or FICO as we all know them were the first to take these mathematical models or algorithm’s as they are sometimes called and begin selling them primarily to the three major bureaus (Equifax, TransUnion and Experian).  Since that time Fair Isaac has and continues to develop many different scoring models for different industries. For our purposes here we will go over the basic elements which are factored into your credit score. 

Payment History-  Approximately 35% of your score is based upon this category.  If you are late with any creditor the most important thing to keep in mind is to get current and stay current. Also, keep in mind that paying off an old collection or charge off will not remove it from your report, since this negative information stays on your report for seven years based upon “date of last activity” you have just “restarted” the seven year clock and now will be legally reflected on your reports for seven more years! The more serious the late payment information the more detrimental effect it will have on your score.  For example one thirty day late is obviously not as serious as a ninety day late regardless of the type of creditor. Another important fact is that different types of late payments decrease your score according to the type of creditor.  In other words, all things being equal one late payment on your home loan is more derogatory then a late payment on your credit card. 

Amounts Owed-  Approximately 30% of your score is based on this category. This is what we call “a debt to credit ratio”.  Simply put, this is the balances divided by the limits on your revolving lines of credit…ie credit cards.  Ideally, the credit scoring system would like to see this ratio below 30%.  If the ratio is 30-50% it will it will slightly lower your score, 50-70% will begin to more significantly lower your score and anything over 70% you may see your score tumble! 

Length of Credit History-  Approximately 15% of your score is based on this category. As a general rule a longer credit history will increase your score, yet, since this category only comprises 15% of your score we regularly see people who only have a couple of years of credit history who are “A” credit borrowers.  This means they have many other positive factors with a greater effect.  Keep in mind when opening new accounts not to open them too rapidly as this will lower your average account age which will thus lower your score. 

New Credit-  Approximately 10% of your score is based on this category. It’s no secret that Americans have more credit (and thus credit debt!) then any country in the world. As established before, all types of accounts are rated differently so it is advisable to shy away from accounts such as department store or secured credit cards as they are rated much lower then most types of credit. Our company for instance, utilizes methods which can expedite better credit with higher rated credit in a much shorter period of time for those people looking to establish new credit. 

Types of Credit – Approximately 10% of your score is based on this category. Again, here is a category without much weight in the overall picture but is still a factor. Since all types of credit is scored with a separate degree of importance it just makes sense to stay away from too much credit and to only open accounts that are needed. 

This article was written by Tom McKee, owner of New West Credit Consultants.  New West Credit Consultants has 24 years combined experience working with credit, credit scoring and knowledge of applicable Federal Trade Commission laws.  Tom can help increase your credit score.  To contact Tom for a free credit analysis, call him at 800-900-7481 or e-mail him at tom@newwestcc.com.

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