03 Sep Credit Scores: What are the Key Factors in Your Score?
Part 2 of 4. In our last post we covered credit reports, credit bureaus, and how companies come up with those mysterious credit score numbers they claim represent a consumer’s reliability as a borrower.
Key Factors in Your Credit Score
Even though the credit scoring companies keep their equations secret, the key factors they all use are the same. Let’s take a closer look at these credit score factors.
- History of timely payments. If there is one thing you should remember about credit scores, it’s that your bill payment history is the single most important factor affecting your score. Borrowers who have late payments have lower scores, while those with timely payments have higher scores.
- Use of available credit. Borrowers who have available credit but who don’t use it all have higher scores than borrowers who do the opposite. This is known as credit utilization. For example, limiting your monthly credit card balance to less than about 25 percent of your credit limit is good for your score, while maxing out each card you own is very bad.
- Average credit account length. Lenders believe that borrowers who have a long history are more reliable than people who have only been using credit a short time. Consumers with a longer average credit history tend to have higher scores than new borrowers without much of a history.
- Types of credit used. Consumer with multiple types of credit will have higher credit scores than consumers who have fewer types. For example, a consumer with a car loan, student loan, mortgage, personal line of credit, and several credit cards accounts will score better than a person who only has one or two credit cards and no other type of loan.
- Number of new credit accounts. You lower your score slighlty every time you open a new account. Opening multiple accounts in a short time, for example, is not a good idea.
- Public Record Items. When a borrower goes to court over a debt, the court records become publically available. Negative public records can significantly lower your score. These include:
- Collections. When a creditor sues you for an unpaid debt, wins, and then begins the collections process, this negatively affects your credit score.
- Foreclosures. A foreclosure is also a serious negative against your score. Foreclosures can proceed through a lawsuit or through a non-court or non-judicial process, but they are always detrimental.
- Bankruptcies. When your debts are too large and you have to file for bankruptcy protection, this tells lenders that you’ve had difficulty managing your credit. While filing for bankruptcy protection is a huge negative, it may not hurt your score as much as you would think because of the positive impact it can have on other areas of your report.
Credit Score Factor Myths
Credit scores change over time, and a low credit score is not the end of the world. Further, much of what people believe about their scores is wrong. In our next post, we’ll take a closer look at your credit score after filing for bankruptcy, and why a bankruptcy isn’t nearly as bad for your score as many people believe it to be.