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Until relatively recently, finding out your credit score was nearly impossible. Most of us had to apply for a loan and then surreptitiously ask the loan officer what our score was. They were the industry’s best-kept secret. Now they’re easy to get and many are obsessed with their personal credit score.
Your Credit Score Factors
Few, however, seem to understand what really makes up their credit score.
Here’s the big 5 factors and how they weigh in on your score. Of course, each credit bureau is slightly different, but these averages will give you a better idea of how they come up with those otherwise arbitrary numbers.
This is about 35% of your score’s weight.
It’s the largest single factor because it’s the best representation of your ability and willingness to make payments on time and on budget. Everything from late payments to bankruptcy and collections are in this category.
This is the next-largest chunk, or about 30%, of your overall score.
This is calculated both as a total debt owed vs. income (debt:income ratio) and as a total debt to credit (debt:credit ratio). Both are measures of financial stability and acumen. The higher your debt:income and/or debt:credit ratios are, the lower your score will be.
This comprises about 15% of your score and is a direct measure of your ability to make long-term commitments and stick to them.
If your payment history and amount owed are in good shape, the length of your existing credit relationships will determine your worthiness. Especially for longer-term credit such as vehicle or real estate loans.
This is about 10% of your score.
The more active you’ve been seeking new credit and the amount of new (usually in the past 12 months) versus old (older than 12 months) credit you have on your record, the lower your score.
Seeking new credit when older credit is still in place makes it appear that you’re looking for new debt to possibly throw your finances out of whack either by living beyond your means or (worse, as far as creditors are concerned) in anticipation of a big event like bankruptcy.
The last 10% is in this category, which is a little more complex than the others.
Credit is basically broken into three categories: short-term, long-term, and unsecured. The first and last are the most variable and, thus, the most useful for this part of the score.
Having a variety of credit types (say an unsecured, revolving account plus a short-term signature loan) means you’ve been found worthy by several unrelated creditors.
For instance, it’s easy to have four credit cards, but more difficult to get a signature loan to cover a short-term, immediate need (such as a medical debt or car repair). Having both looks good, provided you aren’t over-extending yourself.
These are the big categories that creditors use to determine scores. Experian, for instance, might weigh one of these less and another more, but overall, the three bureaus roughly use these percentages in their scoring.