Credit Scoring Criteria

Credit card payment histories affect your credit score.

The most widely used credit score is the FICO score, which is a number between 300 and 850 that represents your probability of repaying the loan as agreed. Lenders rely on your credit score as a measure of your ability to repay the loan, so understanding how the credit bureaus calculate your score can help you maximize your score.

Criteria

The five factors that affect your credit score are your payment history (35 percent), your debts owed (30 percent), the length of your credit history (15 percent), the mix of credit types you've used (10 percent) and the amount of new credit you've recently applied for (10 percent).

Time Frame

Most criteria, such as your payment history, defaults and foreclosures, affecting your credit score only go back seven years. However, Chapter 7 bankruptcies remain for 10 years. Though most public records only go back seven years, if you have unpaid tax liens, they can remain on your credit report forever. Inquiries, which note when your credit report is pulled because you applied for new credit, only remain for two years. Also, older credit records have less impact on your credit score than newer credit records.

Misconceptions

Your credit report may list information that is not included in your credit score such as your employment history, income and age. Your gender, race and where you live also have no impact on your credit score. However, lenders may use information such as your income or employment history to supplement the information provided by your credit score when making lending decisions.

Function

The information in your credit report is obtained by the credit bureaus from your creditors. Your creditors, such as banks and credit card companies, report whether you are current on your payments to the bureaus on a regular basis. The credit bureaus then plug the information they receive from the creditors into an algorithm developed and licensed by the Fair Issac Corporation to compute your score.

Significance

Understanding how your credit score is calculated can help you to improve your score. Having a good credit score is important when you are applying for credit, particularly with larger loans such as a mortgage or car loan. Without a good credit score you may not be approved for the loan. Without stellar credit, you will not get the best interest rates on the loans. According to Kiplinger, it takes a credit score of about 760 to get the best rates on mortgages.

References

• MyFICO: What's In Your FICO Score?
• MyFICO: How Long Will Negative Information Remain on My Credit Report?
• MyFICO: What's Not in Your Credit Score?
• Kiplinger: Credit Score Affects Your Rate