So you've got your credit score report. What numbers do they crunch to come up with it? Where's it all coming from? It's really not all that hard to understand, and learning more about what factors influence your individual number can help you improve your credit score in the years to come.
Knowing the Players
Three major credit bureaus, Experian, Equifax and Trans Union, calculate consumer credit scores. Each company has developed statistical models allowing them to determine scores based on your own individual credit history.
About thirty individual factors are used to determine your score. Certain factors, such as loan payment history, may carry more weight than other parts of your credit history. Indeed, it's important to remember that each person is different. A factor that may be important to your score might be less important for someone else because of differences in your credit past. Also, each factor's importance can change as your credit report changes and has new information added to it.
Percentage Breakdowns
There are five broad areas that credit bureaus look at:
Payment History- Details about credit cards, installment loans (such as a car loan), mortgage loans or finance company accounts are considered. Wonder how that late or missed payment affects you? Well, it shows up in this part of your score, which accounts for about 30% of the total.
Outstanding Debt- Total amount owed and the ratio of what's owed to your credit limit is factored in for another 30%.
Credit History- How long have you been building a credit history? How long have specific accounts have been established and how long have you used each account? On average, this category determines about 20% of your score.
Pursuit of New Credit- Applications for credit and the status of new accounts, including a determination of how recent your accounts are, are looked at for another 10%.
Types of Credit In Use- The numbers of accounts and the different types of accounts, such as bank cards, department store cards, and installment loans are all considered. This category usually rates another 10% of your final credit score.
Scoring Higher
Knowing your credit score is important. Perhaps even more important, however, are the reasons detailed in your score report about why your score isn't higher than it is. Possible reasons for lower scores may include:
Too much debt on existing accounts
Past delinquency on accounts
Too many accounts opened in the last twelve months
Collection history
Excessive number of accounts with balances owed
No recent account history
These are action items that you as a consumer can have an effect on. Your credit report changes day to day as you make payments or increase balances. For example, if you pay off your credit cards in full every month and maintain a responsible credit history, your score will gradually start to reflect those balances.
