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Credit Score Factors: What are They?

By Philip Tirone

Most people do not understand the credit process or credit score factors, even though they have credit cards.

In response to my client’s question, “What exactly are all the credit score factors I should consider when learning how to build credit?” here’s my reply.

22 criteria determine a person’s credit score. However, these criteria are divided into five credit score categories. Each category is listed and explained below:

Payment History is the single highest credit score factor. It accounts for 35 percent of your credit score. Are your payments on time? Do you occasionally make late payments? If so, how delinquent are they? Have you missed any payments lately?

Based on the answers to the above questions, your credit score will reflect your payment history. If you always pay your bills on time, your credit score is probably good. It’s certainly better than someone who rarely pays their bills on time. However, if you have a lot of recent late payments, especially if those payments are older than 90 days, your score is probably low.

This credit score factor encompasses your credit cards, mortgages, car loans and other installment loans, student loans, and retail credit card accounts. Late payment details are also considered. Without a doubt, late payments within the past six months have the greatest impact on your credit score. Late payments more than 24 months old have less impact on your credit score.

Outstanding Balances are the second-most important of the credit score factors. It is only 5 percent lower than your payment history and comprises 30 percent of your score. The lower your outstanding balances, especially in relation to your credit limit, the higher your credit score will be.

Utilization rate is definitely important because it reveals how much debt you’re carrying in comparison to your credit limit. This number is expressed as a percentage of debt to your credit card limits. Credit cards with balances that never exceed more than 30 percent of the limit have higher credit scores.

This category of credit-scoring also looks at how much you owe on home loans, car loans, or other loans versus how much you originally borrowed. If you have a new loan, credit-scoring systems usually consider you riskier than someone who is five or ten years into a loan. Loans usually take about six months to “mature,” meaning they might harm your score at first, but after six months of on-time payments, your score will probably start to climb.

Age of Your Credit History is important because it lets lenders know if you’re a beginner or a seasoned credit card holder. It’s a lot like wine: the older your credit history, the better! This credit score factors accounts for 15 percent of your credit score. This component looks at individual accounts as well as the average age of all your accounts. Remember:  the older your accounts, the better.

Mix of Credit considers all the types of credit you have. This credit score factor accounts for 10 percent of your credit score. Credit bureaus look for variety. They reward you with a higher credit score if you have three to five credit cards, a mortgage, and an installment loan.

Paying cash is awesome! But not having enough variety in your credit report or not having enough credit can lower your credit score. Why? Because the credit-scoring models do not have enough information to determine whether you can responsibly manage debt and high limits.

Credit Inquiries also accounts for 10 percent of your credit score. Whenever you apply for credit, a hard inquiry shows up on your credit report. A hard inquiry is when a creditor runs a credit check to see if you are credit worthy. Hard inquiries slightly decrease your credit score.

Please note that you can check your credit report whenever you wish. This is a soft inquiry and does not decrease your credit score.

Note:  Hard inquiries remain on your credit report for two years, but they only minimally affect your credit score for one year. Soft inquiries never affect your credit score.

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