In recent years, issues like credit reports and credit scores have become more publicized and as a result, millions of consumers now know exactly how important they can be to ongoing financial health. However, despite this increased knowledge of how ratings, which care culled from information contained in reports, can impact one's financial standing, many typically do not know exactly what goes into such a score.
There are a lot of misconceptions about the various factors that determine a borrower's credit scores, as many consumers think aspects such as their age, salary, the value of their assets, and other issues may be used. However, this simply isn't the case. While some lenders may use certain aspects of non-credit financial data when considering a borrower for specific types of loans — this being most common when dealing with larger financing options such as mortgages — the factors that go into a credit score in general are only related to how they've handled their debts in the past.
It's important that consumers not carry any misunderstandings about how these scores are determined when they conduct the business of maintaining their finances over the course of a month or year, so that they can guarantee their standings will be as good as they possibly can be going forward.
The two biggest factors
Fortunately, when it comes to figuring out what goes into a credit score, the two issues that are considered most important are also the easiest to understand.
The single largest factor that goes into determining a credit rating is simply how good they have been about making sure they're paying all their bills on time and in full every month. This payment history factor accounts for a full 35 percent of a score and is therefore extremely important to maintain; any misstep in this area can cause even a good credit score that has been upheld for years to tumble by hundreds of points.
And unfortunately for borrowers who miss payment deadlines — whether it's by a month or a single day in some cases — there is no real way to deal with the issue or have it stricken from their borrowing records. Instead, the best they can do is to prove to lenders that the incident was a one-time mistake that won't be repeated, through several months of on-time payments. Scores damaged by a late payment can only be repaired in this way.
The second-largest credit score consideration — which accounts for another 30 percent of one's ratings — is what is known as "credit utilization ratio." This is an industry term for the amount of debt a person carries at any one time when viewed as a percentage of their total allowable limits. Coincidentally, while many borrowers may wrongly believe lenders like borrowers with lots of debt outstanding, in reality the best way to max out this portion of one's scores is to keep balances to 30 percent of limits or less.
What else may be considered?
There are three more considerations that go into calculating one's ratings, but they are of less individual importance.
Of these, the largest is the average length of time borrowers have had all their accounts combined. For instance, a mortgage they've had for 25 years, a credit card they've had 10 years apiece and a 5-year-old auto loan have an average age of 13.3 years. The longer the average age, the higher this factor, which makes up 15 percent of a score, will be.
The final two considerations make up 10 percent apiece and are somewhat easier to control.
The first is called "credit mix," and is simple to understand: The more different account types one has, the better this portion of the rating will be. For example, someone with student loans, a mortgage, credit cards and an auto loan will be better off than someone with only two or three of those accounts.
Finally, the number of times a consumer has applied for credit in the past few months is also a factor. The more applications they submit, the lower their scores will be, as this is viewed as an indicator that they're having cash flow issues, and may therefore be a riskier investment. However, repeated applications for one type of credit in a few weeks is often permissible, as this may be considered by lenders to be a matter of a borrower shopping around for the best possible rate, usually on larger lines of credit like mortgages, instead of a sign that a person is having severe difficulties dealing with their finances.
Of course, because credit scores are comprised of information listed on consumers' credit reports, it may be wise for borrowers to check these documents on a regular basis to determine whether any unfair markings are dragging down their standings. If so, it might be wise to contact a credit repair law firm as a means of potentially correcting the issues.