Understanding how your credit score is calculated (and what it is that can lower that score) is a crucial part of maintaining healthy financial habits. In this article, we will discuss the most significant thing that affects a consumer’s credit score, as well as a few other things that should be considered as well.
If you don’t know your credit score, click here to learn what it is while reading through this article (it will help a lot). And for some, if you know your credit score needs some help, that’s totally okay as well– we specialize in credit repair. Click here to begin building the credit score you’ve always wanted.
But before we get to those, let’s talk a little about how a credit score is calculated in the first place.
What Goes into Generating a Credit Score?
A large portion of your financial history is reported to one or all three of the major credit bureaus – Equifax, Experian, and TransUnion. While not all of your accounts are reported by the creditors you have borrowed from, many of them are. And because not all creditors report information to all three of the bureaus, certain entries will show up on one of your credit reports, but not necessarily on all of them.
Whenever a potential lender runs your credit, one of these reports is run through a scoring model that will generate a credit score based on the criteria of that particular model and the information within your history. While there are many different credit scoring models, the most frequently used are FICO and VantageScore. Which one is used will depend on the type of loan you are seeking and the specific lender’s choice.
Did you know that you are allowed a free copy of your credit report annually from each of the three major credit bureaus? You should take full advantage of this fact to stay on top of your financial health.
What Hurts a Credit Score?
Nowadays, a credit score of 740 or higher is considered to be ideal. If your score is currently below 650, however, you might want to consider looking into repairing your credit. There are a lot of factors that go into determining your credit score, but this is specifically a list of things that can impact your credit in a negative way. This list is arranged from “most” to “least” damaging, and we will explore in further detail below.
- Bankruptcy
- Foreclosure
- Repossession
- Loan default
- Court judgments
- Collections
- Past due payments
- Late payments
- Credit rejections
- Credit inquiries
Late Payments: Failing to pay your bills on time can hit your credit score hard. Even a single late payment that becomes overdue by 30 days or more can become a big problem. This is a slippery slope that can also lead to some of the other things higher on the list – such as Collections, Foreclosure, or Bankruptcy.
Credit Utilization is Too High: The difference between your account balances when compared to your limits is something that potential lenders look at as well. Depending on how high this percentage gets, they may decide that your debt is already too high to consider opening a new line of credit with you. A rate of 10% or less is best, while anything above 30% is typically considered too high.
Credit History is Too New: Unproven credit history is almost as difficult to overcome as a low credit score. Lenders want to see how you are able to manage money and, if there isn’t enough proof over six months to a year (or more), they may not agree to sign a contract with you. If possible, you should try to keep as many of your accounts open for 7 years or more.
Not Enough Mixed Credit: Lenders want to see that you can handle several different forms of credit, such as a credit card, student loan, auto loan, or mortgage. If you have only ever had one type of debt, they might not feel that you will be other to take on another. It is a bit of a Catch-22 since lenders who might open you a line of credit are wanting you to have other lines of credit open in order to consider you, but that is simply how it works.
Too Many Credit Inquiries: Every time you apply for credit (or a lender does on your behalf), it temporarily drops your score by a small amount. But if there are too many of those applications within a short period of time, it brings your score even lower. It likely will also cause potential lenders to see you as high-risk. Inquiries of this kind, even if you do not open that line of credit, will stay in your file for 2 years.
The Nitty Gritty
As we stated before, there are two main credit-scoring companies that are used by most potential lenders. These again are FICO and VantageScore. Both of these services use five main factors when calculating a credit score, but they have slight variations to them. They also rate these factors with slightly different values. Let’s take a look.
FICO Classic Credit Score
FICO scores cover a range from 300 to 850, with a good score falling between 670 and 739. This list includes what percentage each of these factors carries in determining an overall credit score.
- Payment History – 35%
- Amounts Owed – 30%
- Length of Credit History – 15%
- Credit Mix – 10%
- New Credit – 10%
VantageScore
Some of the older scoring models of VantageScore used a different scale for credit scores (ranging from 501 to 990), but with their 3.0 and 4.0 models, they have adopted the same scale as FICO. A good credit score according to VantageScore falls between 661 and 780. While VantageScore uses different factors, as well as how much weight each one carries, the principle remains the same.
- Extremely Influential – Total Credit Usage, Balance, and Available Credit
- Highly Influential – Credit Mix and Experience
- Moderately Influential – Payment History
- Less Influential – Age of Credit History
- Less Influential – New Accounts Opened
So Then What is the #1 Factor?
The bottom line is that it depends on which credit scoring model is being used by the potential lender that is running your credit. If they are using FICO, then your payment history is the biggest contributing factor that is taken into consideration. But, if they are using VantageScore, then your available credit, balances, and total credit usage are the things that contribute the most to the credit score that comes back. The safest bet is to keep the things mentioned in the first part of this article in mind and avoid the pitfalls that will hurt your credit.
