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Credit score factors

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5 Credit Score Factors That Matter

2022-03-02

Credit scores are important, and that’s no secret.

But what actually comprises a credit score? How is it different from your credit report? And is it possible to actually improve your credit score?

We’re answering each of those questions in today’s blog, so you can take command of your credit.

Credit Score vs Credit Report

While these two terms are often used interchangeably, they have key differences worth discussing.

Lenders may assess both your credit score and credit report when you apply for a credit card, car loan, or mortgage. After all, they’re both reliable indicators of an individual’s ability to honor agreements and pay back debts.

Though their functions are similar, their forms are quite different.

For example, your credit report provides a comprehensive overview of your total credit history (as produced by the three major credit-reporting agencies, Equifax, Experian and TransUnion). Your credit report will contain relevant information about your lines of credit, payment history, balances, bankruptcies and past-due accounts.

While potential creditors and lenders use credit reports, many employers and landlords might also request them before offering a job or lease.

On the other hand, your credit score is a filtration of your credit report. It’s the three-digit number that embodies all of the contributing factors in your larger credit report.

In other words, think of it like your high school GPA. Whereas your credit report is like a detailed analysis of each subject you studied on your report card, your credit score is your simplified grade point average.

Here’s the good news: the five components of a credit score are easily identified.

1. 35%: “Payment History”

Two of the most widely used credit score models on the market are FICO® Score and VantageScore. Though they are scored somewhat similarly, FICO® Scores remain the industry leader in the United States.

As such, we’ll use their five-point model to show how scores are calculated.

Payment history accounts for a whopping 35% of your credit score. In other words, paying your bills on time has major ramifications for your total score.

While charge-offs, collections, tax liens, and repossession can sink your credit score, paying your bills on time remains the most basic way to improve your credit score.

2. 30% - “Amounts Owed”

While “Amounts Owed” is the official term, it essentially refers to your debt level. In other words, this component of your credit score determines how much of the available credit you’re currently using.

To be clear, debt itself isn’t a bad thing. But if it appears you are overextended (and potentially less likely to pay your bills on time), your score may be adversely affected.

When it comes to credit cards, this ratio is known as your “credit utilization,” or the percentage of total available credit you’re using.

Experian, one of the three major credit-reporting agencies, recommends keeping your total credit utilization rate below 30% (a fitting number for the factor that also contributes 30% to your total credit score).

3. 15% - “Length of Credit History”

How long you’ve had credit plays a part in your credit score. FICO assesses the following components about your credit history “age”:

  • How long your credit accounts have been open. Including:
    • The age of your oldest account
    • The age of your newest account
    • The average age of all your accounts
  • How long specific credit accounts have been established
  • How long it has been since you used certain accounts

Opening new accounts can directly affect your credit score, as we’ll discuss below.

4. 10% - “Credit Mix”

Though Payment History and Amounts Owed constitute the bulk of your credit score, other factors still play an important role.

Your “Credit Mix” is an assessment of all your current credit types, like credit cards (i.e. “revolving accounts”) and installment loans (like auto loans, student loans, and mortgages).

Generally speaking, it can be beneficial to have a variety of credit products, as it shows lenders that you’re comfortable managing different types of debt.

Still, your Credit Mix accounts for just 10% of your credit score, so don’t worry if you’re only using one type of credit product.

5. 10% - “New Credit”

As a general rule, try to avoid opening multiple new accounts in a short time span, as your credit score will almost certainly be lowered.

Why are new accounts so punitive? Because they lower your average account age, which comprises 15% of your total score. Plus, when you apply for new credit, the creditor or lender will likely need to issue an inquiry into your credit score. This credit check or “hard inquiry” may lower your score. While such inquiries stay on your credit report for two years, they only remain on your FICO® Score for one.

Note: Checking your own credit report will not affect your credit score. While applications for new credit often require a “hard” credit inquiry, checking your own credit report through Experian, Equifax, and TransUnion only results in a “soft” inquiry.

Here’s to a Higher Score

Learning about how each of these factors affect your credit could help set you in the right credit score direction. So keep in mind your payment history, amount owed, length of credit history, credit mix, and new credit info, and work to make it healthy.

Welcome to First Phase: where less-than-perfect is more than enough.

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