5 Keys of Credit Scoring
What exactly makes up your credit score and
how can you improve it?
What are the components that make up your
credit score? What can you do to improve your credit score?
This article (courtesy of information made available through
MyFico.com... see reference at right under "Elsewhere on the
Web") will try to answer those questions. For more detailed
information on the origination of credit scoring along with the
value and drawbacks of credit scoring, I suggest some of the
articles referenced in the upper right section of this page
under related resources.
MyFico states that, "Your credit score changes
whenever your credit report changes. But scores do not change
month to month that much. In a given 3 month time period, only
1 in 4 people has a 20-point change in their score."
Fico scores consider 5 main categories for
scoring consideration and are weighted according to importance:
Payment History -35%; Length Of History -15%; Amounts Owed
-30%; New Credit -10%; Types of Credit -10%. Though a credit
score takes in all the categories for its score, it is possible
that different consumer groups could be rated slightly
differently. For example, a new consumer to the credit world
might be weighted differently than an established long term
With that in mind, here are the suggested
categories expanded along with tips to increase your scoring
potential within each category.
Payment History -
is the most heavily weighted section of your
credit score and constitutes 35%.
Pay your bills on time.
The longer your history of on time payment, the
better your score. If paying off a collection account, or
closing an account on which you previously missed a payment, be
aware that any negative comment in association with such
delinquencies will remain on your credit report for 7.5 years.
Although this reflects your past credit
pattern, the longer the time since the discrepancy the less the
impact on current credit score. Additionally your credit score
will be impacted more dramatically depending on how late the
payment was. Was it 30 days, 60 days, 90 days?
Per MyFico, "A 60-day late payment made just a
month ago will affect a score more than a 90-day late payment
from five years ago." All items are relative to the amount of
time past. In addition to currency, how many accounts were
late, by how much, and when. If there was one 90 day late five
years ago, that is far less troublesome then 3-30 days late last
If you cannot make a payment, contact your
creditors or see a legitimate credit counselor. Though taking
such action won’t improve your score immediately, your score
will get better over time if you are able to correct the
situation. Please note credit counselors normally do not report
to credit bureaus, however creditors sometime do.
Length of Credit History -
is about 15% of your score.
As a general rule, the older the account, the
higher the score. But the scoring process views not only your
oldest accounts but the average age of all of your accounts. So
if you feel a need to close an account, close the newest first.
Also taken into account is how long it has been since you used
On the other side of the coin, it simply makes
good sense that your score will be lowered if you suddenly open
a lot of new accounts. This happens quite often when a person
gets their first credit card. Ego takes over and all incoming
offers of new credit cards are accepted. Then when applying for
a car or home, the neophyte learns their credit score has
suddenly gone south and favorable rates have disappeared.
Continue on to page 2 to learn more of the
other 50% of your credit score.
The other 50% of your score and FICO
- 30% of your score is based on the amounts you owe.
Owing a great deal on credit cards does not
mean you are a high-risk category requiring a low score. On the
other hand this is a possibility especially if there are
numerous accounts and the payment history is poor.
Part of the science of scoring is determining
how much is too much for a given credit profile. Your score
takes into account the amount you owe on pecific types of
accounts, such as credit cards and installment loans.
In some cases, having a very small balance
without missing a payment shows that you have managed credit
responsibly, and may be slightly better than carrying no balance
at all. On the other hand, closing unused credit accounts that
show zero balances and that are in good standing will not raise
your score. Similarly a large number of account balances can
indicate higher risk of over-extension.
Also how much of the total credit line is
being used? Many authorities seem to feel 40%-60% of maximum is
Another question is, what types of accounts are
showing? Are they mortgage loans, credit cards, retail
outlets? And with installment loan accounts (car, furniture
etc.) how much still owed compared with the original loan
amounts can be important? Paying down installment loans is a
good sign that you are able and willing to manage and repay
So keep balances low on credit
cards and other “revolving credit.” Pay off debt rather than
transferring balances. According to MyFico.com, "The most
effective way to improve your score in this area is by paying
down your revolving credit. In fact, owing the same amount but
having fewer open accounts may lower your score." Don’t close
unused credit cards as a short-term strategy to raise your score
but don’t open a number of new credit cards just to increase
your available credit.
New Credit Accounts -
10% of your score.
According to Fair,Isaac, "... research shows
that opening several credit accounts in a short period of time
does represent greater risk—especially for people who do not
have a long-established credit history. Multiple credit requests
also represent greater credit risk. However, FICO scores do a
good job of distinguishing between a search for many new credit
accounts and rate shopping for one new account."
It should be noted that although credit
inquiries remain on your credit report for two years, only the
last 12 months are considered. It also should be noted that
multiple inquiries such as for a car loan within a 14 day period
are counted as one inquiry only. Similarly requesting your own
credit report does not constitute an inquiry.
Types of Credit in Use -
will constitute the last 10% of your
Types of credit (or credit mix) include credit
from retailers, finance companies, installment loans, and
mortgagors. According to MyFico.com, "Credit mix is not usually
a key factor in determining your score—but it will be more
important if your credit report does not have a lot of other
information on which to base a score." Therefore such issues as
kinds of credit and how many of each is used to establish this
In conclusion - At
MyFico.com, you will find the following table entitled, "How Do
People Score?" (based on the general US population’s FICO
- Above 780 .... 20%
- 740 to780 .... 20%
- 690 to 740 .... 20%
- 620 to 690 .... 20%
- Below 620 .... 20%
You will also find the following: "FICO scores
provide the best guide to future risk based solely on credit
report data. The higher the score, the lower the risk. But no
score says whether a specific individual will be a 'good' or
'bad' customer. And while many lenders use FICO scores to help
them make lending decisions, each lender has its own strategy,
including the level of risk it finds acceptable for a given
credit product. There is no single 'cutoff score' used by all