Understanding Credit Score Factors and Improving Your Credit Scores

The elements from your credit report that shape your credit scores are called credit score factors. Some factors that may affect credit scores are:

• Your total debt
• Types of accounts
• Number of late payments
• Age of accounts

Factors indicate what elements of your credit history most affected the credit score at the time it was calculated. They also tell you what you must address in your credit history to become more creditworthy over time.

Why Lenders Use Credit Scores

Before credit scores, lenders physically looked over each applicant’s credit report to determine whether to grant credit. This process was time-consuming, led to mistakes or biased results, and allowed lenders to make decisions that may have had little bearing on the applicant’s ability to repay debt.

Today, credit scores help lenders assess risk more fairly.

• Credit scores are consistent and objective
• They reflect only your likelihood to repay debt responsibly based on your past credit history and current credit status.

Checking your own credit does not affect your credit score

Your credit scores are determined by formulas that assess your creditworthiness. Lenders evaluate the risk of extending credit to you in part by using credit scores, which measures your credit risk — namely, how likely it is that you’ll pay them back and pay on time. Credit scores constantly adjust as the information in your credit report changes. You’ll benefit from knowing your credit score and keeping track of changes and setbacks.

There is no fast way to improve a mediocre credit score if it is based on accurate information. Consumers sometimes find inaccurate information reflected in their credit report that could affect their credit score. It is easy to file a dispute with the credit reporting agencies, but you won’t be able to do this unless you have a copy of your credit report.

What is a credit score and how is a credit score calculated?

Credit score models are used to compare the information in your credit history to evaluate your relative risk by balancing the negative and positive factors in your credit report.

Credit Score ranges

The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher. Generally, a “low” credit score is in the “fair” to “poor” ranges. (See charts).

What is a Good Credit Score?

For a score with a range between 300-850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most credit scores fall between 600 and 750. Higher scores represent better credit decisions and can make creditors more confident that you will repay your future debts as agreed.

Credit scores are used by lenders, including banks providing mortgage loans, credit card companies, and even car dealerships financing auto purchases, to make decisions about whether or not to offer your credit (such as a credit card or loan) and what the terms of the offer (such as the interest rate or down payment) will be. There are many different types of credit scores. FICO® Scores and scores by VantageScore are two of the most common types of credit scores, but industry-specific scores also exist.

Why Credit Scores Matter

Credit scores are decision-making tools that lenders use to help them anticipate how likely you are to repay your loan on time. Credit scores are also sometimes called risk scores, because they help lenders assess the risk that you won’t be able to repay the debt as agreed.

Having good credit is important, because it determines whether you’ll qualify for a loan. And, depending on the interest rate of the loan you qualify for, it could mean the difference between hundreds and even thousands of dollars in savings. A good credit score could also mean that you are able to rent the apartment you want, or even get cell phone service that you need.

Think of your credit scores like a report card that you might review at the end of a school term, but instead of letter grades, your activity ends up within a scoring range. However, unlike academic grades, credit scores aren’t stored as part of your credit history. Rather, your score is generated each time a lender requests it, according to the credit scoring model of their choice.

Every time you set a major financial goal, like becoming a homeowner or getting a new car, your credit is likely to be a part of that financing picture. Your credit scores will help lenders determine whether or not you qualify for a loan and how good the terms of the loan will be.

However, credit scores are usually not the only things lenders will look at when deciding to extend you credit or offer you a loan. Your credit report also contains details which could be taken into consideration, such as the total amount of debt you have, the types of credit in your report, and any derogatory marks you may have. Other than your credit report and credit scores, lenders may also consider your total expenses against your monthly income (known as your debt-to-income ratio), depending on the type of loan you’re seeking.

Factors That Affect Your Credit Scores

The information that impacts a credit score varies depending on the scoring model being used. Credit scores are generally affected by elements in your credit report, such as:

• Payment history for loans and credit cards, including the number and severity of late payments
• Credit utilization rate
• Type, number and age of credit accounts
• Total debt
• Public records such as bankruptcy, civil judgments, or tax liens
• How many new credit accounts you’ve recently opened
• Number of inquiries for your credit report

FICO Score Factors:

• Most influential: Payment history on loans and credit cards
• Highly influential: Total debt and amounts owed
• Moderately influential: Length of credit history
• Less influential: New credit and credit mix (the types of accounts you have)

VantageScore Factors

• Most influential: Payment history
• Highly influential: Age and type of credit, percent of credit limit used
• Moderately influential: Total balances and debt
• Less influential: Recent credit behavior and inquiries, available credit 

Credit scores do not consider the following information

• Your race, color, religion, national origin, sex or marital status (U. S. law prohibits credit scoring formulas from considering these facts, any receipt of public assistance or the exercise of any consumer right under the Consumer Credit Protection Act.)
• Your age
• Your salary, occupation, title, employer, date employed or employment history (However, lenders may consider this information in making their overall approval decisions.)
• Where you live
• Certain types of inquiries (requests for your credit report). The score does not count “consumer disclosure inquiry,” which is a request you have made for your own credit report in order to check it. It also does not count “promotional inquiry” requests made by lenders in order to make a “preapproved” credit offer or “account review inquiry” requests made by lenders to review your account with them. Inquiries for employment purposes are also not counted.

Minimum Credit Scores

There is no minimum credit score needed to apply for most loans or credit cards. However, you are less likely to qualify for a loan or credit card and less likely to receive favorable rates when your credit score is low. If you are trying to qualify for a conventional loan or credit card with a low credit score, you may wish to wait until your credit improves, so you can ensure you get the best rates possible.

Some mortgage servicers such as the FHA provide general guidelines for those with credit scores on the lower end:

• FHA mortgage loans require a minimum of 580 or higher with a 3.5% down payment.
• For FHA applicants under 580, qualification for a loan is still possible, but a 10% down payment would be required along with meeting other requirements. See FHA’s site for more information.

What to Do If You Don’t Have a Credit Score

In some cases, you might not have enough credit history to have a credit score. Depending on your age, there are several ways to establish credit.

If you are under 21, you must have a cosigner or be able to demonstrate that you have an adequate source of income to pay back any credit that is extended. With responsible usage, a parent cosigning a credit card (or adding you as an authorized user to one of their accounts) is a great way to help establish a positive credit history.

For others, the best way to establish credit may be to work with your bank or credit union to open account with a small credit limit to get you started. Opening a secured credit card is another way to get started building your credit. Then, with time and good account management, a good credit history (and scores) will be within your reach.