Your Score is based on five things:
35% Payment History
- Your ability to pay on time is the most important factor of your score. Your Payment History affects your score in three ways:
- Recency – How long has it been since your last late payment? The longer the better and the less it affects your score. Basically, they want to know if you’ve recently had hard times.
- Frequency – Everyone has a late hiccup, but a steady flow of late payments just doesn’t look good and lowers your score even more.
- Severity – Being 120 days late weighs heavier than 30 days late. And letting an account reach Collections or having a tax lein or bankruptucy weighs even heavier.
30% Amount of Debt
- Lenders look at how much you owe others. If you are using most of your available credit on your accounts, this will decrease your score. Why? Studies indicate that people who max out their limits have a higher risk of defaulting on their payments. Maxing out your $500 credit card limit gives the message that you may be low on cash. The Credit Bureaus pass this message along to potential lenders in the form of taking points from your score.
15% Length of Credit History
- Like fine wine, credit gets better with time. The age of your oldest account is the star in this category. Also, the overall age of all your accounts is factored in. Having 10 years of no late payments vs 10 months is a better indicator of your payment behavior. The more aged your accounts become, the more your score increases. “No” credit history is often just as bad as “bad” credit. Why? Well if lenders have no payment history to judge you by, how will they know that you will be good about paying your bills? Lenders need black and white proof that you are good about paying debts on time and for a long time. Luckily, the credit bureaus give you points for good behavior.
10% Account Diversity
- Having a mixture of types of credit such as credit cards, installment loans, and a mortgage loan works in favor of your credit score.
10% New Credit (Average Age of Accounts)
- Opening new accounts can sometimes hurt your credit score temporarily until those accounts become more aged. The scoring system takes into account the following:
- How many accounts the consumer applied for recently. These are called Inquiries.
- How many new accounts the consumer has opened
- How much time has passed since the consumer applied for credit
- How much time has passed since the consumer opened an account