What information is used to calculate my credit score, and what factors will lower my score?
If you have tried looking on the consumer reporting agencies’ (CRAs, also know as Credit Bureaus) websites, you have seen they provide VERY little information as to how your credit score is calculated. They believe this information is proprietary and therefore their “secret”. They do, however, provide a list of the main factors which affect your credit score:
- Payment History
Equifax says: “Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.” (No kidding)
TransUnion says: “A good record of on-time payments will help boost your credit score.”
Equifax lists: “Serious delinquency; Serious delinquency, and public record or collection field; Time since delinquency is too recent or unknown; Level of delinquency on accounts is too high; Number of accounts with delinquency is too high”
TransUnion lists: “Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections”
- Balance-to-Limit Ratio
Equifax says: “Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.”
TransUnion says: “Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.”
Ok, so avoid maxing out your credit – because if you don’t really need more credit you’ll be able to get it, and if you do really need it then you are more of a risk.(Funny how that works)
- Recent Inquiries
Equifax says: “Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why.”
TransUnion says: “Avoid excessive inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.”
There are two types of Credit Bureau file inquires: “hard inquiries” such as an application for new credit, which will lower your score; and “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts for approving credit limit increases, for example – these will not appear in your file or lower your credit score.
Although a “flurry of inquiries” may indicate financial difficulties, it could also be that you are moving to a new city, and will need to apply for a new mortgage, a new electric/gas account, cable, phone and other utility accounts. These “inquiries” into your account will deduct points from your score, so you may take a rather large hit (points wise) on your credit rating for moving houses.
Also of concern is that inquiries for non-credit purposes (such as utility companies and car rentals), will cause your credit score to drop without adding points for having credit in good standing, as with a credit card that you pay off every month. So be careful to only apply for credit you really need.
- Length/history of Accounts
Equifax says: A “common negative score factor… [is the] length of time accounts has been established is too short”
TransUnion says: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.”
Having a long history of your credit accounts earns you more points, so avoid closing your accounts if you may need them in the future. A good credit history is built over time – sorry, but there is no quick fix for this one.
- Variety of Credit Accounts
TransUnion says: “A healthy credit profile has a balanced mix of credit accounts and loans.”
Having a mix of credit products (credit card, retail store card, a line of credit, car loan, etc) will procure more points on your file than having only one type of credit, such as only credit cards.
- Too many accounts.
Having a lot of credit accounts, especially if many of them carry balances, is another warning sign of financial distress, so if the Credit Bureaus think you have too many, they will deduct points.