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How Your Credit Score is Calculated

Credit scoring is used to calculate the probability that credit users will pay back their loans. The scores are known as FICO scores because they were developed by Fair, Isaac & Company.  People with higher credit scores have a higher probability of paying back all that they owe. The scores range from 0 to 900. A score of 650 or above is generally considered a good score and is eligible for most credit offers at the best interest rates.  But because all lenders use their own guidelines for determining whether to give a loan, there is no set cutoff defining what is an acceptable credit risk.

Besides the information listed below, credit scores also take into account some non-financial information, such as length of time at current address and employment history.

Factors in how your credit score is calculated

Your credit score is calculated by a formula whose exact details are a trade secret.  However, all but the most specific details are public knowledge. 

Five factors influence the score and are weighted according to the following percentages:

Payment History 35%

Amount Owed 30%

Length of Credit 15%

Pursuit of New Credit 10%

Types of Credit Experience 10%

Payment History

This is the factor most likely to be lowered by choosing debt settlement.

Payment history is a record of whether payments have been late or missed on any credit accounts. They take into account:

  • how recent the missed payments were
  • how many days late they were
  • on what fraction of your accounts you have made late or missed payments. 

A few late payments a few years ago carry far less weight than currently outstanding unpaid debts.

It also contains a record of whether there have been any:

  • bankruptcies
  • lawsuits
  • judgements
  • liens
  • debts sent to collections
  • garnished wages. 

These are all strongly negative, but more recent marks are worse than older ones.

Amount Owed

This is the factor most likely to be immediately helped by debt settlement.

It includes:

  • the total amount owed to all creditors
  • the types of credit involved
  • the number of open accounts
  • how close to your credit limit you are on each account

It is best not to have more than three credit card accounts, and to have more credit available than you are using.  Amount owed on a house or car is weighted differently than on a credit card, but it all affects this part of the score.

Length of Credit

The bureau considers:

  • The age of your oldest account
  • The average age of all your accounts
  • How long it has been since you used each account

In general, the longer you use credit, the better your score.

Pursuit of New Credit

Attempting to get new credit can hurt this portion of your score.  This is determined by counting the number of credit inquiries (requests for a credit report, or credit checks).  However, certain types of inquiries shouldn’t affect this score.  These include

  • requests for your own credit report
  • mortgage or auto loan inquires made around the same time
  • inquiries for pre-approved credit cards.

Inquiries made recently have a more negative impact.

Types of Credit Experience

Having a mix of different kinds of loans (credit card, department store accounts, car loan, mortgage) can help this portion of the score.  However, opening new accounts just to increase this portion of the score will cause other areas to decrease. Therefore, doing so is not a good idea.

Reasons for Scores

When potential lenders receive your credit report, they also receive a list of the top four reasons the score isn’t higher.  A list of the possible reasons appears below.

Account payment history too new to rate.

  • Amount owed on accounts is too high.
  • Amount owed on revolving accounts is too high.
  • Amount past due on accounts.
  • Consumer finance accounts.
  • Date of last inquiry too recent.
  • Delinquency on accounts.
  • Lack of recent bank revolving information.
  • Lack of recent installment loan information.
  • Lack of recent revolving account information.
  • Length of credit history is too short.
  • Length of revolving credit history is too short.
  • No recent bankcard balances.
  • No recent non-mortgage balance information.
  • No recent revolving balances.
  • Number of accounts with delinquency.
  • Number of bank revolving or other revolving accounts.
  • Number of established accounts.
  • Number of revolving accounts.
  • Proportion of balances to credit limits is too high on revolving accounts.
  • Proportion of loan balances to loan amounts is too high.
  • Serious delinquency, derogatory public record, or collection.
  • Time since delinquency is too recent or unknown.
  • Time since derogatory public record or collection.
  • Time since most recent account opening too short.
  • Too few accounts currently paid as agreed.
  • Too few accounts with recent payment information.
  • Too few bank revolving accounts.
  • Too many accounts opened in the last 12 months.
  • Too many accounts with balances.
  • Too many bank or national revolving accounts with balances.
  • Too many bank or national revolving accounts.

Too many recent inquiries in the last 12 months.

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Disclaimer: Debt Shield, Inc. does not provide legal, tax or investment advice. Debt Shield, Inc. does not assist in the repair, modification, improvement, extension or correction of credit entries or reporting.

For an explanation of how your credit score is calculated, make sure to do your research. Many factors go into how your credit score is calculated, and you should be aware of each.