What Makes Up A Credit Score

Credit scores are calculated by rating a prospective borrower's financial history, including your payment track record, over a period of time in a different document (credit report). A seasoned loan officer combines the information contained in your credit report with another document - your credit score - to determine your risk level. The lower your credit score, the higher the risk, according to that lender or bank.

Three major credit reporting agencies - Equifax, Experian and Trans Union, collect and compile loan-related information about you known as credit information, which includes your payment history, your current debt and how much credit you currently have available. Information about your employment, income and bank balance are taken into account as well. Through this process, a finance company, a loan company or a bank can evaluate if you are a good or bad credit risk. The following are factors that go into calculating your credit score.

Payment history with lenders (35%)

Your credit score is 35 percent dependent upon your payment history with lenders over the discretionary versus credit review period. The most relevant period is usually the last 24 months. The score goes up or down depending on the foundation of the scores reached from the reference period. A credit score that is higher is considered more favorable than one that is lower.

Credit balance to limit ratio (30%)

Your credit score is 30 percent dependent upon your credit balance to credit limit ratio. For example, if a buyer purchases a $300,000 home with a $200,000 credit limit, he or she will have a more favorable credit status. The reason for this is that the 80 percent of the credit or total credit limit is utilized if a borrower pays the balance with $300,000 and has a $200,000 credit limit. Decreasing the credit amount at the same time increasing credit limit, shows that the consumer can better control debt if the balances are lower.

Length of credit history (15%)

The longer a person has had credit, the higher his or her credit score. Be careful of closing credit accounts if your credit history is short. Owing money to others will lower your credit score, while owing money on your own can make it worse. 

Number of accounts (10%)

The more number of credit accounts, the lower your score. 5 or fewer credit accounts is treated as a higher risk than having 5 or more, and does not make the score any higher. If you know this golden rule, you can either put all your department store cards on the back burner, be careful about department store cards or give your department store a call to see if they can help you out of your current situation.

Types of credit accounts (10%)

The number of credit accounts,upsets the number of installment accounts or the number of mortgage loans, car loans, etc., that you have.

Credit inquiry (10%)

You can have a max of 7,000 inquiries without it having a negative impact on your credit score. However, having 4 or more inquiries within a short period of time or having too many credit accounts can lower your credit score.