How Is Your Credit Score Determined
Your credit scores are determined by credit scoring models that analyze one of your consumer credit reports and then assign a score using complex calculations.
FICO® and VantageScore®, the two main consumer credit scoring models, look for information that indicates if someone is more likely or less likely to miss a payment. A higher score means there’s a lower chance that the person will miss a payment, which is why having a higher credit score can help you qualify for favorable rates and terms from lenders.
Specific factors and how they’re weighted when determining your credit scores differ according to the credit model calculating them. They also vary depending on the type of credit score and which credit report from the three national credit bureaus is used when calculating the scores. Read on to find out which factors determine your credit score.
Which 5 Factors And Types Of Credit Affect Your Fico Credit Score
Have you ever wondered which factors and types of credit will bring you the highest possible credit score? Responsible use of your credit can get you there with one loan paid on time. But what is the right mix of the different factors and credit types to boost your score even higher?
There are 4 types of credit. Credit cards, known as revolving credit, installment loans, mortgages and auto loans. You want to have a good mix of all of them to help keep your credit score as high as possible. Having all of the types of credit is not necessary to have a high score though. See the exact factors affecting your score.
Length Of Credit History: ~15% Sarah Schmalbruch / Business Insider
According to Bera, this refers to how long your credit accounts have existed. She says a general rule of thumb is that the longer your credit history is, the better that is for your score. But, this isn’t always the case.
“People with older credit histories can have poor scores if they’ve used credit irresponsibly, while younger individuals who haven’t had credit very long, but have used it wisely, can have great scores,” Bera says.
Note that this factor measures the age of your credit history, not your individual credit cards. If you close one, it will not change the age of your history.
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The Affect Of High Balances Vs Credit Limits
A couple of months ago, I had a septic tank in one of my rentals that needed to be replaced. The contractor did not give a discount for cash. I created my own discount by putting the new septic system on one of my higher paying points cards.
Approximately $7400 hit my balance in one charge. Now I always pay off my credit cards every month in full. My score only took a 30 point hit from this one balance. I paid it off on the due date like I usually do. On my next credit report, the balance vs. credit limit hit my score.
I am curious to see how long it will take to get those points back. Now I have to wait 30 days to see what my score will do once it hits the credit reporting system with a new lower balance.
The factor for the 30 point damage to my score was this:
- Balance to credit limit ratio on one credit card
My limit on that card was $12k dollars. Putting close to $8k on the card in one month caused the drop in score. I had used over 60% of my credit limit. BAM!
Fortunately, I have a high enough score that it is not a big deal and I am not planning on using my credit anytime soon. Regardless, my score is still in the high 700s and will not prevent me from obtaining excellent rates and terms.
If you have a lower score that stems from other factors, you can lose up to 100 points when you make these types of purchases or have a late payment. If I was concerned about losing points from my credit score it would have been beneficial to spread the $7400 over two or three cards.
Option #: Secured Credit Cards
This type of card provides many benefits including being very easy to get approved for. Why? The financial institution has zero risk as its up to the cardholder to use their own money to pay for the deposit. All payments will be made on the cardholders credit report and most have a limit of $200 up to $5,000. Plus, there is a low annual fee between $10-$30.
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What Is A Credit Score
A credit score is a 3-digit number that reflects the likelihood that a consumer will repay his debts. With so many scoring methods used to determine your credit score, the variety of models means your score can vary several points, depending on whose model is used and what type of business is asking for it.
The most recognized credit score is the FICO score, which comes from the Fair Isaac Company. FICO has more than 50 different versions of your score that it sends to lenders. The score may change, depending on what company asks and what was important to that company in calculating your score.
That means your FICO score for a department store might be slightly better than your FICO score for a bank considering you for an auto loan. And that will be slightly different from your FICO score for insurance, which could vary from your score for a mortgage loan.
Its also possible the inquiring company could use your Vantage Score, a Community Empower score or one from any of three of the major credit reporting bureaus, Experian, Equifax and TransUnion, to judge your credit worthiness.
How Does A Credit Score Work
Your credit score is a number related to your credit history. If your credit score is high, your credit is good. If your credit score is low, your credit is bad.
There are different credit scores. Each credit reporting company creates a credit score. Other companies create scores, too. The range is different, but it usually goes from about 300 to 850 .
It costs money to look at your credit score. Sometimes a company might say the score is free. But usually there is a cost.
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Tip #: Update Your Information And Correct Misleading Information
Reviewing your free credit report can notify you about any credit cards in Canada that are open in your name that shouldnt be there. Additionally, youll be able to spot any information that isnt correct and reach out to a credit bureau to get it rectified.
Sometimes you can find negative information thats hurting your credit score. Youll want to make sure thats addressed sooner rather than later.
Checking Your Credit Report In Canada
Interested in personally reviewing your credit report? You can easily obtain a free copy through either Equifax Canada or TransUnion Canada. Simply answer a few identification questions and youll receive a hard copy in the mail in a few weeks. If you want to review your credit report before 2-3 weeks, you can go through either bureau and pay $20 for an online version.
We mentioned this before but since different credit bureaus use different factors to determine credit scores, we recommend getting reports from both of these companies for a more accurate assessment, as your score might differ between the two.
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Your Browsing History May Soon Determine Your Credit Score
The next Orwellian event to strike the United States could arrive any day now.
Your credit history, according to a Yahoo Finance article, may be less essential in determining whether or not you are approved for a loan.
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Instead, your browsing history on the internet could be the deciding factor.
According to the International Monetary Fund , this could aid borrowers who would otherwise be turned down by financial institutions due to low credit.
Others see this as the next stage in âbig brotherâ encroaching on their freedoms.
On Sunday, Yahoo Finance reported the scoop, attempting to portray credit companiesâ unfettered access to Americansâ browsing history as a beneficial thing:
In the not-too-distant future, your internet habits could help determine how much house you can buy and the rate on your next auto loan.
Hereâs what the future of lending might hold and how to get the best rates on loans in the meantime.
Other Accounts Included In A Credit Report
Your mobile phone and internet provider may report your accounts to your credit bureau. They can appear in your credit report, even though they arent credit accounts.
Your mortgage information and your mortgage payment history may also appear in your credit report. The credit bureaus decides if they use this information when they determine your credit score
A home equity line of credit that is added to your mortgage may be treated as part of your mortgage in your credit report. If your HELOC is a separate account from your mortgage, it is reported separately.
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What Is A Credit Report
A is a summary of how you pay your financial obligations. It contains information based on what you have done in the past. Lenders use it to verify information about you, see your borrowing activity and find out about your repayment history. Some of the information on your credit report is used to determine your credit score.
What Is A Good Credit History What Do I Need For A Good Credit Score
A good credit history typically shows that youve made payments on time and dont use too much of your available credit. While different lenders have different standards for what qualifies as a good credit score, scores starting in the high 600s and up to the mid-700s are generally considered to be good.
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To Close Or Not To Close
Borrowers who already have loans, meanwhile, should take their length of credit history into account before closing an existing credit account. Thats because, as discussed earlier, closed accounts will eventually fall off their credit reports.
Once those accounts are removed from your credit reports, they will no longer be included in the calculation of your FICO score, since the score is calculated as a snapshot of your reports at a specific time. That means that closing an account can dramatically shorten your credit history, depending on how long youve had your individual cards and if you dont take out any new credit cards or loans in the near term.
Closing an account can have a more immediate impact on your utilization ratio the amount you owe compared to your which could also hurt your FICO score.
For instance, if you have one card with a $10,000 credit limit and a zero balance, and another card with a $5,000 limit and a $4,000 balance, your overall utilization ratio is 27 percent. But if you close the $10,000 limit card perhaps because its not being used your credit utilization rate jumps to 80 percent. Such a dramatic change in your debt-to-limit ratio would almost certainly hurt your score.
Understanding Fico Credit Scoring Models
FICO credit scoring models are an analysis of your personal spending and payment habits used by the three credit bureaus. They evaluate your risk and lending guidelines determine your likelihood to receive credit based on your scores and other factors. Simply put, the agencies look at certain characteristics found in a persons spending and payment patterns and compare those against years of credit data. They then analyze those patterns and come up with a .
Much of this is based on statistical information from past borrowers over many years. As an example, if X number of borrowers utilizes their credit card balances above 70% of the credit limit and then default within 12 months, those statistics are used to predict future behavior. Statistically, future borrowers who follow similar patterns are also at risk for defaulting in the next 12 months. The lending guidelines change to reflect the current statistics and models which also change periodically.
The system is designed this way. The higher the score, the less likely it is that a borrower will miss payments or go into default.
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What Can I Do To Improve My Credit Score
When you get your credit score, you might get information on how you can improve it. Improving your score a lot is likely to take some time, but it can be done. Under most scoring systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt.
Life Insurance Companies That Dont Check Credit History: Whats The Bottom Line
Having good credit makes shopping for life insurance more accessible. In addition, high credit scores are associated with lower prices.
But the best insurance companies usually check credit scores to gauge your risk even though it wont impact your life insurance rates much.
Now that you know more about life insurance companies that check credit history use our free comparison tool below to compare multiple insurance companies in your area.
What Is A Credit Scoring Model
Scoring calculations are based on payment record, frequency of payments, amount of debts, credit charge-offs and number of credit cards held. A weight is assigned to each factor considered in the models formula, and a credit score is assigned based on the evaluation.
Scores generally range from 300 to 850 .
Lenders use credit scores to help determine the risk involved in making a loan, the terms of the loan and the interest rate. The higher your score, the better the terms of a loan will be for you. There are different credit score models, which emphasize varying factors.
How To Improve Your Credit Score
The best things you can do to improve your credit score are to manage your money wisely using a realistic spending plan and to deal with your debts. Despite what some might claim, there is no quick-fix for factual but negative information on your credit report. Time and living within your means are what it takes to improve your credit rating. However, in some situations there may be a couple of things you can do to improve your score more quickly.
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Why Is My Credit Report Important
Businesses look at your credit report when you apply for:
- loans from a bank
If you apply for one of these, the business wants to know if you pay your bills. The business also wants to know if you owe money to someone else. The business uses the information in your credit report to decide whether to give you a loan, a credit card, a job, or insurance.
Amount Of Balances Owed: ~35%
Bera refers to this as the ratio of credit available to you to the balances you have on your lines of credit. Essentially, it measures how much of your available credit you use. The less, the better.
She writes, “having lots of available credit but only using a small percentage of it is good for your score. Having a small amount of available credit and charging up to the limit even if you pay off the balance monthly won’t help your score.”
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Why Should I Get My Credit Report
An important reason to get your credit report is to find problems or mistakes and fix them:
- You might find somebodys information in your report by mistake.
- You might find information about you from a long time ago.
- You might find accounts that are not yours. That might mean someone stole your identity.
You want to know what is in your report. The information in your report will help decide whether you get a loan, a credit card, a job or insurance.
If the information is wrong, you can try to fix it. If the information is right but not so good you can try to improve your credit history.
How Do I Improve My Credit
Look at your free credit report. The report will tell you how to improve your credit history. Only you can improve your credit. No one else can fix information in your credit report that is not good, but is correct.
It takes time to improve your credit history. Here are some ways to help rebuild your credit.
- Pay your bills by the date they are due. This is the most important thing you can do.
- Lower the amount you owe, especially on your credit cards. Owing a lot of money hurts your credit history.
- Do not get new credit cards if you do not need them. A lot of new credit hurts your credit history.
- Do not close older credit cards. Having credit for a longer time helps your rating.
After six to nine months of this, check your credit report again. You can use one of your free reports from Annual Credit Report.
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How Do Credit Scores Work In Canada
Typically, a score above 650 will allow you to easily qualify for a loan in Canada. While a score of 650 and under can bring difficulty in securing a loan, there are plenty of Canadian lenders who specialize in those with a low credit score.
According to one of Canadas financial bureaus, TransUnion, most Canadians will have a credit score between 620 and 679.