HOW IS MY CREDIT SCORE DETERMINED?

I recently got an email from my credit card company saying “Congratulations! You have reached a Credit Score of 800! Welcome to the 800 Club!” I thought I had finally achieved a perfect credit score: Yay! Crushing it! Feeling impressed with myself, I bragged to a colleague who immediately informed me that 850 is the best score, not 800. So, that made me wonder, how is my credit score determined? How can I improve it? What makes it go down? I did a little digging and have summarized my findings below for your convenience.

What factors impact credit score and by how much?

1.?????Payment History: HIGH IMPACT – 35%

Payment history is the most important factor and given the most weight by creditors. This reflects your ability to pay your bills on time. Lenders want to know your historical track record of payments, so they can determine your ability to repay a loan.

• Creditors typically report payment activity (good & bad), to bureaus every 30 days.
• Types of accounts that are reported include Credit Cards, Student Loans, Personal Loans, Car Loans and Mortgage Payments. Utility bills including electricity, phone, and cable won’t impact your score unless your account is sent to collections.
• PRO TIP: A single late payment can make an impact, so always pay your bills on-time.

2.?????Amounts Owed / Outstanding Debt: HIGH IMPACT – 30%

The total amount of money you owe at any given time. Lenders want to know how leveraged you are, and if you can really afford to pay the loan amount requested.

• Creditors use outstanding debt to identify high-risk borrowers. A person carrying little debt is considered lower risk than a person who frequently owes high amounts of money. So, lower credit balances are typically better for your credit score.
• Credit utilization is how much of your available credit you use during a month. It’s calculated by dividing the credit you are using by the total credit limit of all your accounts. For instance, if you only have one credit card with a $2,000 credit limit and have a $200 balance on that card, your credit utilization ratio would be 20%.
• It’s best to keep your credit utilization between 10-30% to optimize your credit score.

3.?????Length of Credit History / Credit Age: MEDIUM IMPACT 15%

The number of years you have been building your credit. The older your accounts, the better your score. This shows lenders you have experience handling credit. Credit age is a combination of two factors:

• The age of your oldest credit account
• The average age of your combined accounts (the sum of the ages of all your accounts divided by the number of accounts you have)
• PRO TIP: Don’t close your oldest accounts unless you absolutely must and avoid opening too many new accounts at once.

4.?????New Credit Inquiries: LOW IMPACT - 10%

There are two types of inquiries lenders can make.

• Soft inquiries: used to determine whether you’re prequalified for a loan offer, or when you check your own credit score – these don’t appear on your credit report.
• Hard inquiries: these occur when you apply for a new line of credit. These do show up on your credit report and affect your score for one year, and account for about 10% of your total score. While hard inquiries are impossible to avoid, it’s best to have as few as possible.

The number of soft or hard inquiries on your credit report. Every time you apply for a loan, your credit report is pinged. More pings could be a red flag for lenders.

5.?????Credit Mix: LOW IMPACT - 10%

The types and number of debts you have outstanding your credit mix. Car loans, home mortgages, credit card bills, pay day loans, and others all impact your score differently. It is best to have a mix of revolving debts (credit cards) and installment debts (car loan).

Having a diverse credit portfolio shows lenders that you have experience handling different types of debt successfully.

What other factors can impact your credit score?

Errors: about 40 million Americans have errors in their credit report due to data entry errors, miscommunication and even fraud. A credit monitoring service can help you stay on top of this.

• Medical Bills
• Closing Accounts
• Missing Rent Payments
• Not Paying Your Taxes
• Defaulting on Accounts

Collections: if you don’t pay a bill on time, the creditor may send your account to collections. In some cases, the issuer may sell your debt to a third-party debt collector. Examples of accounts that can end up in collections include:

• Unpaid Parking and Traffic Tickets
• Utility Bills
• Cell Phone Bills
• Bank overdraft Fees
• Gym Memberships
• Child Support
• Auto Deficiencies

So, what doesn’t impact your credit score? Thankfully, not every piece of financial information impacts your credit score. Factors that are irrelevant in determining your score include:

• Income and Assets
• Bank Account Balance
• Employment Status
• Debit Card Use
• Home Address
• Age
• Marital Status

The Bottom Line? Credit score is a complicated equation that takes into account a number of factors, all weighted differently. But knowledge is power and understanding what goes into your score can help you create positive financial habits to increase your score.