Credit is a mystery for many people. It’s often impossible to figure out exactly how your score came to be what it is. Part of this is probably intentional on the part of the credit bureaus – by keeping the formula secret, they can stay ahead of people who might try to game the credit system. Unfortunately, the side effect of this is that people have a hard time realizing what impacted their score.
Because the formula for calculating your credit scores is protected by the Fair Isaac Corporation (FICO®) with even more secrecy than KFC protects its 11 herbs and spices, it’s impossible for anyone outside of the credit bureaus – led by Experian, Equifax and TransUnion – to calculate your credit score. That being said, FICO is open about what factors affect your score and how much weight they’re given in the formula.
Before taking a deeper dive on select credit topics, let’s go over the types of things that affect your credit score.
Factors Affecting Credit Score
There are five major factors that affect your credit score. Let’s briefly take a look at each of them.
This one is relatively simple. If you make your credit card and loan payments on time, this tends to help your credit score. If you have late payments, your credit score will be lower.
History and trends matter. A late payment will always lower your score, but if you have a history of on-time payments, it may not affect your score as much is it would for someone who is consistently late. On the other hand, it may take longer for someone who is typically late to build up their score with on-time payments.
Late payments, collections and charge-offs are lumped into this category. We’ll go over how to deal with these and how to properly calculate the age of these items later on in this post.
Payment history accounts for 35% of the credit scoring formula.
Representing 30% of the formula, your credit utilization refers to how much credit you’re using compared to your monthly limits. For example, if you have a credit card balance of $250 and your credit limit is $1,000, you’re utilizing 25% of your available credit.
Regardless of whether you pay off your full monthly balance, you shouldn’t utilize more than 30% of your credit in any given month. Doing so can lower your score.
Length of History
The credit bureaus also consider the length of your history, which makes up 15% of your score. This is measured from the time you open up a credit card or close on a car loan or mortgage.
The idea here is that the longer you have your accounts open, the more you can prove you’ve been responsible with credit. You don’t have to have four credit cards, plus a car and a student loan in order to get a mortgage, but a long history of responsibility doesn’t hurt.
Credit inquiries make up 10% of your score. If you’re applying for a mortgage, it’s not a good idea to apply for three credit cards and a car loan at the same time. This is because credit companies want to know that you’re not overextending yourself with credit. For this reason, each hard inquiry made at the time of application will temporarily knock down your score a little bit.
The big exception to this is if you’re shopping for the best rate. If you get your credit pulled by multiple mortgage originators in order to get the best deal buying a house, all inquiries made within one 30-day period are considered one inquiry.
Credit mix accounts for the final 10% of the credit score formula. For the creditors, this is all about knowing that you can handle various different types of credit, including both revolving accounts like credit cards and installment loans like a mortgage, student or personal loan.
Now that we know what goes into your credit score, let’s take a closer look at a couple of topics that might give you a better understanding of how your credit report and score work when you apply for a loan.
What Are Ranges of Credit Scores?
It’s hard to give a definitive answer to this question because it depends on where and how you get the score and what model is being used.
In general, most credit scoring models now score people from 300–850, with the higher number being the better.
FICO and Other Credit Scores
FICO has various versions of its scoring model that are used by the major credit bureaus to give lenders an idea of whether they’re making a good lending decision. The exact credit scoring model being used depends on the bureau and the lender, but FICO is usually the model being used.
This is an important distinction to make because most of the time when you get your credit report and score from websites, you get a VantageScore, which uses the same scale as FICO but was developed by the credit bureaus themselves.
There are some big advantages to the VantageScore system. Any time you view your credit report or get your score, it’s considered a soft pull, meaning you see your credit without affecting your score. You also get tips on how to improve your score in a way that you wouldn’t if you were just viewing your FICO report.
However, when it comes to the official version of your credit score, most lenders still use FICO. If you want to see your FICO score and report through AnnualCreditReport.com, you can get it for free from each of the bureaus once per year as mandated by federal law.
It’s important to note the information and score of each of the bureaus, especially before applying for a loan, because they may vary. One bureau may have information that another bureau doesn’t, or your score may be different because they use different FICO models. If you find anything wrong, you can then dispute that information with the individual bureaus.
If you’re applying for a car or mortgage loan or are worried you might have recently been the victim of identity theft, you might choose to pull all three reports at once. On the other hand, if you’re just doing some periodic monitoring, you might choose to get the report from a different bureau every four months so you can track your FICO score throughout the year.
How Do I Find Out My Credit Score?
There are various sites that will give you access to one or more credit reports and scores for free on a periodic basis.
How Long Until My Credit Score Goes Up?
There’s no quick fix for credit, and it depends on what you’re doing to improve your credit. If you consistently have a good payment history and low balances, it’s likely your credit score will always remain high.
If it’s a matter of catching up with late payments and staying current, things will take a little longer, but the older the late payment is, the less it will impact your score.
Negative credit items like collections, charge-offs and bankruptcies can stay on your credit report for between seven and 10 years. When these items come off, it may have a big boosting effect on your score. That said, merely paying off a collection or charge-off doesn’t remove it from the report. You need to negotiate that with the creditor, although if you’re willing to pay the full amount off, many of them will work with you.
How Is Age of Credit Calculated?
When people refer to the age of credit, they usually mean how long it’s been since accounts have been open or since you closed on a particular loan. The longer you have lines of credit open, the better. This is important for creditors to evaluate because they see responsible management over an extended period of time.
When evaluating the length of your credit history, creditors are looking at the average amount of time you’ve had accounts open.
The other credit issue that has a timeframe component is the age of items on your credit report. Negative credit items such as late payments, unpaid liens, collections or bankruptcy can stay in your credit for between seven and 10 years. If it’s a court proceeding like a bankruptcy, this starts the day the bankruptcy judgment is filed. If it’s a late payment, it’s measured from the day you were first considered delinquent and never current again.
How Is My Credit Score Calculated for a Mortgage?
In most cases, lenders get your credit score from all three bureaus. There’s usually some variance in the scores based on the FICO model being used and the information the bureau has.
For a single borrower, lenders take a look at the median score of the three. If there are two or more clients on a loan, the mortgage lender has to go with the lowest median score of all borrowers on the loan.
In the event that only two scores are collected, the lower of the two scores is used.
Now that you know a bit more about how your score is calculated, check out these tips on how to build your credit.
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