How Are Credit Scores Calculated?

A credit score is mainly used by financial institutions and businesses to see if you are likely to make the payments on a large product as agreed. It allows them to decide if they should take a risk on you.

Main Factors Considered in Calculating a Credit Score:

Your payment history – 35%

When looking into your credit score, the history will include information about how you have repaid the credit you have already acquired, or that has been extended to you. This includes credit accounts such as credit cards, lines of credit, retail department store accounts, installment loans, auto loans, student loans, finance company accounts, home equity loans and all mortgage loans (primary, secondary, vacation homes and investment properties). The lender will be able to acess any information on late payments, missed payments, public record items, and collection information. It also states how many late or missed payments have occured as well as how recently this may have happened.

Used credit vs available credit – 30%

How much of the total available credit is being used on your credit cards and revolving lines of credit is a key component of the analysis of your credit score. For example, if the limit on your credit card is $5,000 and you keep the balance at $4,500, it tells the lender that you rely heavily on credit for day to day living.

Credit history – 15%

Another important aspect is how long you have had your credit accounts. Generally, creditors prefer to see that you have managed credit accounts responsibly over time. They will most likely check on the longest credit account you have as well as the most recent.

Public records – 10%

People with a prior history of bankrupcy, or have had collection issues may be considered an at-risk client. The presence of these events may significantly and negatively impact a credit score.

Inquiries – 10%

The request for information is logged on the file as an inquiry anytime an individual’s credit file is accessed for any reason. So if you are in the habit of going to car retailers, boat stores or snowmobile dealerships and asking them to check if you can buy a product, this constitutes an inquiry and affects your credit score. This is why it is important to only use one carefully chosen lender when buying a house. AND, you should stay away from all other big purchases until you have moved into your new house!

source: Education Center