What goes into your credit score

Up until the year 2000, consumers were not able to know what their credit score was, your credits core was a secret that the lending companies guarded closely. The reason for this was that it was felt that because the credit score was such a complex formula most people would have a hard time understanding it. Not to mention that if people knew what their credit scores were they would be able to change their behavior to manipulate their score, which could possibly render the whole model useless. In 2000, E-Loan began offering consumers their credit scores free, but in addition to that, they also gave them information about how their score was calculated and what things they could do to improve it. For this Fair Isaac cut off E-Loan from its source of credit reports, this prevented them from giving out loans. Therefore, E-Loan had to stop giving out free credit scores.

However, the damage was already done people began to demand that they see their credit reports. There was a public outcry about the fact that people were being denied credit based on bad information in credit reports. Due to the people's response several pieces of legislation were passed, including the Fair Credit Reporting Act. This helped lead the way for people to obtain a copy of the credit reports free once every 12 months. These new laws also made it possible for you to buy your credit scores from a number of sources.

If you want to know what your FICO score is, you will have to purchase it from an authorized source, such as one of the three credit bureaus. The reason for this is that even if you know what factors go into your credit score the formula that they use to analyze all of the data is too complex for most people to figure out their own credit score. However, this shouldn't stop you from knowing what goes into your credit score and what influences it the most. Knowing this information can go a long way in helping you improve your credit score so that you have one of the best credit scores possible.

Here is a look at the major factors that go into your credit score.

Number one: Payment history
This is the most important factor when determining your credit score. It accounts for a little more than 35% of your FICO score. Your payment history is going to include all of your on time payments for any loans that you have and for credit cards. It will also include any late payments that you have on these same accounts; the later the payments are the more it will affect your credit score. For example, a 60-day late payment is going to affect your credit score worse than a 30-day late payment. If your landlord reports to the credit bureaus your rent payments can affect your payment history, and so can things like medical bills. If you have bills that are sent to collections, this is going to look worse on your credit report then just late payments and a bankruptcy is going to look even worse. The reason for this is that it shows that you cannot manage your finances wisely.

Number two: Current debt
How much debt you are currently carrying on your credit report is going to account for about 30% of your credit score, which make sit the second most important factor when determining your FICO score. When determining this aspect of your credits core the major thing that they are going to be looking at is how much debt you have compared to how much money you are currently making, this is called your debt to income ratio. When figuring out how much debt you have everything is taken into consideration, such as payday loans, department store loans, medical bills, car loans, etc. Something else that they look at is how much of your available credit you are using. For example, if you have a credit limit of $500 and you are using $450 of that credit. The more of the available credit that you are using the worse it looks on your credit report. You want to try to keep your debt down to about 35% of your actual credit. People with the highest credit scores use credit sparingly and keep their balances low.

Number three: Length of credit history
How long you have had your credit accounts for is going to account for about 15% of your credit score. What they are looking for is how long you have had accounts opened in your name, but also how well you have managed those accounts. You want to begin working on your credit history as soon as possible because the longer you have had the accounts for the better it looks on your credit score. For example, your parents might co-sign a loan for a car with you when you are 18, which is as soon as you can start building your credit history. Keep in mind that you will get more points for having long-standing accounts with the same credit issuers.

Number four: Credit inquiries
About 10% of your credit score is based on how many accounts you have attempted to open in the past six months, but it also looks at whether you have opened any new accounts in the past six months. The more inquires that are on your credit report the worse it is going to be for your credit score. For example, you apply for a new credit card at a department store to save 10%. They will pull your credit report and even if you are approved that is great, unless you have opened up about six other new accounts in the past few months. Alternatively, if you are not approved it will negatively effect your credit score because you were denied. Keep in mind that the pre-approved offers that you receive in the mail will not count against your credit score as inquires. The only time it will affect your credit score is when you fill out the paperwork asking for the credit card. Checking your own credit report and credit score is not going to affect your credit score either, as long as you request your credit reports and scores from the credit bureaus themselves or from a company that is authorized to hand out credit reports and scores.

Number five: Type of debt
The final 10% of your credit score is going to be based on what types of credit accounts that you have. For example, a mortgage is viewed differently than credit card debt and a car loan is a better type of loan to have than a payday loan. You do want to have a mix of installment loans and revolving loans on your credit report, but you also want to have good debt rather than bad debt. Having twenty different credit cards that you pay on time and keep down to a low balance will still reflect positively on your credit score, but a single mortgage is going to do more to raise your credit score as long as you pay it on time.

While everything from your age to your employment history is included in your credit report that does not mean that everything is in your credit report, is going to be included in your credits core. The thing is that with this information, the lender might use the information to make a final decision on approving your loan, but it does not play a role in calculating your FICO score.

Here is a list of things that are not going to be looked at when your credit score is being determined:

• Age
  
• Race
  
• Sex
  
• Job or length of employment at your job
  
• Monthly income
  
• Level of education
  
• Martial status
  
• If you have been turned down for credit in the past
  
• How long you have lived at your current address
  
• Whether you own your home or rent, although a mortgage will be used in your credits core because of payments
  
• Any information that is not contained in your credit report, which is not very much

The biggest problem that people have with their credit scores is that their credit scores can contain errors, which makes their credit score wrong and this can have a negative effect on people when trying to purchase a home or a car. It is because of these errors that it is recommended that you check your credit reports at least once every twelve months. If you do not do that then you at least need to check your credit reports three to six months before you plan to buy a house or a new car. The reason that you want to check your reports is so that you can make any corrections that are needed before a lender pulls your score, which could mean the difference between a high interest rate and a low interest rate.