Five Factors that Determine Your Credit Score

Adam Rust

People on the journey to establish credit should understand how the bureaus run their statistical models.

The credit bureaus focus on five things:

Your payment history (35 percent) No activity matters more than making sure you are current on your debts. When your report says “pays as agreed,” you win. The Bureaus check in with your creditors every month. As soon as a creditor reports that you missed a payment, your score will drop. The impact could be particularly significant if you fall behind on a mortgage. You are better off making minimum payments on all of your credit cards instead of missing a payment on one so that you can pay off your entire balance on another card.

How much you owe: (30 percent) Owing much money sends the wrong signal. That stands to reason – if you are already falling behind, why should a new lender step in to fuel the fire? Defining too much is a product of several factors: if you are utilizing more than 40 percent of the credit on a particular line (home equity line of credit, credit card) of credit, you will be punished. If your overall debt is high relative to your income, your credit score will drop.

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The length of your credit history (15 percent) Maintaining a long-term relationship with a lender impresses the Bureaus. They take that to mean that you are reliable and trustworthy. The Bureaus make models to sell their expertise to lenders. A long credit history suggests that you could be a good customer for their customers! I have read that length is measured by the tenure of your longest account. Even if you are not using one of your accounts that you opened two decades ago, you should consider leaving it open because it will help your score. A caveat is that you would not want to pay an annual fee on a credit card merely to show good behavior to the Bureaus. As with any of these factors, performance is all relative. Closing the account might do little harm. If it only knocks five points off your score, is it worth the annual fee? You will have to decide.

The types of credit you have (10 percent): Your score will drop if you have outstanding unsecured loans and lines of credit. Credit cards, high-cost consumer installment loans, and similar services give the bureaus pause. On the other hand, having a mortgage will not hurt your score and it may help.

Recent inquiries (10 percent): The bureaus will downgrade your score if you have applied for credit in the last six months. The hunch behind using this action as a factor in a model is that when a person asks for more credit, they must be facing some cash flow constraints. When you submit to a credit check for something other than a loan, find out if the company will run a “hard pull” or a “soft pull.” Hard pulls count as a recent inquiry. Soft pulls do not.

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