The Composition of a Credit Score

Why is it that you are able to be pre-qualified for an offer of credit that you didn’t ask for?  Or even receive a response online that states you are approved for credit within seconds?  Better yet, why are some people refused credit yet others are approved?  The answer to these questions rests with a numerical summary of your credit history, or credit score.  It is only three digits long, but it tells lenders the likelihood that you will pay them on time.  

Your credit report is comprised of five sections.  Each section carries a certain weight during the calculation of your credit score. 

1)  Payment history comprises 35% of the credit score.  Most lenders try to determine how likely it is that you will pay them on time, or at all.  Therefore, it seems logical to have the section that carried the most weight be the payment history section.  Everything about your past payments, both good and bad, is included in this section, including any bankruptcies or collections.  The most recent history affects your score heavier than the older history. 

2)  Outstanding debt comprises 30% of the credit score.  The total outstanding debt includes everything that you owe towards any credit card, mortgage, auto loans or any other credit that has been extended to you that you still owe money on.  The limit of each card and how close you are to that limit is also reported.  When you carry balances on your cards close to the maximum or over the limit, it decreases the credit score. 

3)  How far back your report goes comprises 15% of the credit score.  The further back in time your history goes, the credit score is likely to be higher.  The rationale behind this is that with the longer history, payment patterns may be determined.  This makes it easier on the lenders to predict your future payment habits.

4)  Inquiries into your credit comprise 10% of the credit score.  With every application that uses credit as a determinate, there is a record of the inquiry contained within this section.  When there are numerous inquires within a short amount of time, it usually sends a message that you are struggling financially or that you are accumulating debt beyond your means, or both.  However, the good news is only inquires into credit only stay on your report for a year. 

5)  Forms of credit you hold comprise 10% of the credit score.  Carrying a variety of credit gives a better appearance verses carrying only one form.  There is no perfect recipe for the different forms that you should carry.  However, if you do only have one form of credit, if the history goes back far enough it might not even impact our score at all. 

A credit score is now used in a variety of daily transactions.  It’s used to determine interest rates of loans, how much your deposit will be when connecting utilities or buying a cell phone.  Understanding the composition of your credit score empowers you with key knowledge necessary to maintaining the best credit score possible.