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Things That Determine Your Credit Score

Learn what determines your credit score and what it means to your financial situation. Find out why a high credit score can yield you better results when shopping for a mortgage.

Another name for your credit score is your FICO score. FICO stands for Fair Isaac Corporation. This is the company that developed the mathematical formula on how to determine credit scores. Your FICO score is the number that reflects your financial responsibility and helps lenders decide if you are a good credit risk or not. Your credit score is determined at the time of the request and then included with the credit report when it's delivered to the lender.

How Your Credit Score Is Broken Down

There are five main factors that determine your credit score. Below you will find out what the factors are and the approximate percentage of your credit score they attribute to:

Payment History - 35%
This factor has the biggest impact on your score. This is the portion that looks at if you pay your debts on time. A few late payments will have less of an impact if the rest of your credit is strong, and will become less of a burden over time. Mortgage late payments have a greater impact than credit card late payments.

Balances Still Owed - 30%
Having credit accounts and owing money doesn't automatically make you a high risk borrower. Owing lots of money on numerous accounts can suggest that you are financially over extended. A portion of credit scoring is determining how much credit is too much credit for a given profile.

Length Of Credit History - 15%
A longer credit history will generally improve your credit score. It shows that you can responsibly manage your availabel credit over time. Just because you have a long credit history doesn't always mean that your score will be high.

New Credit - 10%
Opening several credit accounts in a short time period can make you appear more of a risk. Request for new credit can also present you as a higher risk. Luckily FICO scores are able to determine between a search for many new credit accounts and just simply rate shopping. FICO score will not generally equate your rate shopping with higher credit risk.

Types Of Credit In Use - 10%
Your FICO score will be a reflection of mortgage loans, installment loans, retail accounts, and credit card accounts. It is not necessary to have have one of each but a good mix of them can improve you score. It's never a good idea to open a credit account that you don't intend on using.

What is a Good Score and What is a Bad Score?

A high score is typically anything above 720. A low score is typically below 600. Falling below 600 doesn't mean that you have no options. A score that is close to can easily be reversed by showing some good credit over a couple months or there may even be errors on your report that are bringing your score down. If you have a lower score, below are some common explanations you may see on your credit report:

Serious delinquency: You have one or more accounts with late payments.

Serious delinquency and public record of collection filed: You have one or more accounts that have gone to a collection agency.

Time since delinquency is too recent or unknown: You have one or more accounts that are recently past due

Level of delinquency on accounts: Your accounts are 60 to 90 days or more past due.

Number of accounts with delinquency: You have numerous past due accounts.

Amount owed on accounts: Your amount of debt is to high.

Proportion of balances to credit limits on revolving accounts is too high: The balances on your credit cards are too high.

Length of time accounts have been established: The length of your credit history is not long enough to determine responsible credit management.

Too many accounts with balances: There are too many accounts open with balances on them.

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