Credit Repair

What is a credit score & how is it calculated?

Your credit score can impact your ability to get a loan, open a credit card, rent a home or even sign up for a mobile phone plan, as well as the interest rate you’ll receive on loans and cards. A high score can make it easier to get approved, and in the case of a home loan could save you tens or even hundreds of thousands of dollars in interest.

Although credit-scoring algorithms are industry secrets, credit-scoring companies do reveal the basics of what impacts a score and how your credit score is calculated — and it all starts with your credit reports.

There are generally three places to find your consumer credit report: Experian, Equifax, and TransUnion. These are the three main credit bureaus that collect consumer credit information in the U.S. Each credit report could have pages and pages of information. This could include your history of payments on credit accounts, whether you have an account in collections and other personal identifying data and public records, such as a bankruptcy.

Credit scores turn the information in your credit report into an easy-to-use number. Think of them like your grade point average in school — all your exams (i.e. credit activity) are included on your credit report, and the credit score is your final GPA. Generally, scores range from 300 to 850, with a higher score being better as it indicates you’re less likely to be late with future payments.

Your credit reports aren’t necessarily identical and your credit score may vary depending on which credit report the score is based on. Additionally, there are many different credit-scoring models and each may calculate your score in a different way.

In this guide we will cover:

The 5 main categories of credit-scoring factors

Payment history (35%)

Current credit use (30%)

Length of credit history (15%)

New credit (10%)

Types of accounts (10%)

What won’t affect your credit score?

Building and maintaining a solid credit score

Different types of credit scores

There’s a misconception that you only have one credit score and that there are real and “fake” credit scores. In reality, there are many different credit scores and lenders may use different scores for different purposes.

For example, FICO®, the primary credit-scoring company in the U.S., creates base FICO credit scores and industry-specific credit scores for auto lenders and credit card issuers. It also updates its credit-scoring models over time, and your score may vary depending on which model a creditor uses.

But FICO isn’t the only credit-scoring company. Credit card issuers, lenders and other creditors may also use a VantageScore credit score. The credit bureaus themselves also create their own credit scores based on their credit reports. Lenders may also have proprietary credit-scoring models that they use instead of (or in addition to) FICO, VantageScore or bureau credit scores.

However, consumer credit scores share some common characteristics — they’re based on information in one of your credit reports, and they help lenders and other creditors determine the likelihood that someone won’t pay a bill on time.

They also tend to use similar factors to determine your score. Understanding these factors, and how each could impact your scores, can help you determine what will help or hurt your credit.

The 5 main categories of credit-scoring factors

A single credit account can affect multiple categories. For example, if you have a credit card, the date on which the card was opened will impact your credit history length, your current balance could be part of the credit use category, and whether you’ve made on-time or late payments is part of your payment history.

Many creditors use either a FICO or VantageScore credit score when evaluating an applicant. Both FICO and VantageScore offer insights into what information affects your credit score and the relative importance of different credit-scoring factors. FICO breaks credit-scoring factors into five categories:

  • Payment history
  • Current credit use
  • Length of credit history
  • New credit
  • Types of accounts


FICO breaks down the categories’ relative importance by percentage. The exact percentage may vary depending on your credit history and the credit-scoring model, but these are a good guideline for the average consumer.

VantageScore also categorizes its credit-scoring factors, although it uses slightly different categories than FICO.

Payment history (35%)

Your payment history includes your history of making on-time or late payments. Paying on time and never having late accounts can help improve your score. However, a late payment could significantly lower your score.

The impact of a late payment can depend on your overall credit file. Even if you have an otherwise clean credit report, a single late payment might lead to a large drop in your score, though you may still be in a good- or excellent credit range. If your credit score is already low, a late payment might not have as drastic of an impact on your score, but it may make it harder to recover.

Your credit report will also indicate how late the payment is (e.g. 30-, 60-, 90-days late), and the damage may increase the further behind you fall. If your account gets sent to collections, that will also appear on your credit report and can negatively impact your credit score.

The payment history category also covers derogatory marks (another name for negative items on your credit report) that come from public records, such as a foreclosure or bankruptcy.

A derogatory mark’s impact can diminish over time. So, even if you’ve had trouble staying on top of your bills in the past, your score can recover. Having a recent record of on-time payments can also help improve your score.

Current credit use (30%)

Your current credit use includes the amount of money you currently owe overall, the amount you owe on each account, the number of accounts you have with balances, and your remaining balance on installment accounts and utilization rate on revolving accounts.

The utilization rate is the percentage of your available credit that you’re currently using and it’s one of the most important factors in the credit use category. If you have three credit cards that have a combined credit limit of $10,000, and your reported balance on all three cards adds up to $5,000, then you’re utilizing 50 percent of your available credit.

Your overall utilization rate and the rate on each individual account are credit-scoring factors — and in both cases, a lower utilization rate is better for your score.

Your utilization rate is also one of the few credit-scoring factors that you have the power to quickly change. Most credit-scoring models only use your most recently reported balances to calculate your utilization rate (in other words, you most recent statement balance). As a result, if you can pay down your credit cards or other revolving accounts, you may be able to see a rise in your score within the next month.

One important point to consider is that your utilization rate is calculated based on the balance in your credit report, which may be different than your current balance. Credit card issuers tend to report balances around the end of your statement period, which is when they send your statement balance and may be several weeks before your bill’s due date. As a result, you may have a high utilization rate even if you pay your bill in full each month and never pay interest.

A helpful credit hack is to make credit card payments before the end of the statement period. Doing so can lower the balance that’s reported to the credit bureaus, which will lower your utilization rate and can help your credit score.

Length of credit history (15%)

The age of your oldest and newest accounts, your overall age of accounts and whether accounts have recent activity can all contribute to the length of credit history category. Generally, a longer credit history will be better for your credit score.

The role that closed accounts play in your credit history calculation can sometimes be confusing.

When you close an account, finish paying off a loan or pay a delinquent account (such as a collections account), the account won’t immediately fall off your credit reports. Instead, the credit bureaus will remove closed accounts that never had late payments 10 years after the account closes. If there was a late payment, the account gets removed seven years after the initial late payment, even if the account has since been sold to one, or several, collection agencies.

Closed accounts continue to affect your length of credit history, and may impact other factors, as long as they appear on your report.

New credit (10%)

Applying for new credit accounts and the length of time since you opened a new account can also impact your score.

Credit inquiries — a record of when someone checks your credit report — fall into this category. Soft credit inquiries, which can happen when a creditor preapproves or prequalifies you for an offer or you check your credit score, won’t impact your score.

But hard inquiries — when someone checks your credit before making a lending decision, for example — can hurt your score, and even can lower your score even if you don’t get approved.

However, these hard inquiries generally only have a minor negative impact, if they change your score at all. Although they stay on your credit reports for two years, as long as you don’t have any derogatory marks, you may see your score recover within a couple of months.

Multiple hard inquiries may increase the negative impact. However, credit-scoring models let you shop around for some types of loans, including mortgages, auto loans, and student loans. Multiple inquiries for these types of accounts that happen within a 14-day window (or longer, depending on the model) may be considered a single inquiry for credit-scoring purposes.

Types of accounts (10%)

Your total number of open and closed accounts and your experience with multiple types of accounts can also impact your score. Having different types of accounts, such as revolving credit card accounts and installment auto, student, personal or home loans can improve your score.

Additionally, your experience with a particular type of account may be a greater factor for industry-specific models. For example, your history of payments on an auto loan may be more important to your auto-industry score than to a basic scoring model.

What won’t affect your credit score?

Even if some of the information appears in your credit reports, a lot of personal and financial data are unlikely to impact your FICO or VantageScore credit scores. This includes:

  • Your age, sex, gender, race, nationality, ethnicity or where you live.
  • Religious or political affiliations.
  • Your marital status.
  • Your income, assets, employment status or job title.
  • The interest rates on your accounts.
  • Whether you receive public assistance or enroll in credit counseling.
  • Anything that isn’t in your credit report.

Building and maintaining a solid credit score

Although the credit-scoring models vary, they’re often similar enough that your scores will rise or fall in tandem. Knowing what can impact a credit score, and which factors are most important, can, therefore, help you improve your scores, and keep them in tip-top shape.

A safe way to approach the credit history length, new credit and types of accounts categories are to only open new accounts when you need them and only close accounts when you no longer need them or if they’re costing you money.

Payment history and credit usage should be the top priorities, as they account for about 65 percent of your score. Paying your bills on time and only using a small portion of your available credit (or making early payments), can help you maximize the potential points from these categories.

If you don’t already have one, you may want to develop a system to track your bills and make sure you won’t accidentally miss a payment. Setting up automatic payments or debits from a checking account could be one solution.

>> View our Best Budgeting Apps of 2018 here

If you’ve missed payments in the past or have other derogatory marks, building a history of on-time payments could also help your score recover. For more information on repairing past credit mistakes, you can click here. It can take patience, though, as the impact of derogatory marks decreases over time.

 

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