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Demystifying credit scores

On Behalf of | Oct 30, 2024 | Credit Repair, Fair Credit Reporting Act Issues

Credit scores are numerical representations of an individual’s creditworthiness used by lenders to assess the risk of lending money. However, when couples apply for joint credit, such as a mortgage or a car loan, lenders typically consider both individuals’ credit scores and histories. These scores are calculated using complex algorithms that analyze data from your credit reports.

The most commonly used credit scoring models are FICO and VantageScore, which consider similar factors but may weigh them differently. Named after Fair Isaac Corporation, the company that developed the credit scoring model, FICO requires at least six months of credit history and recent account activity to generate a score. In comparison, VantageScore produces a score with as little as one month of history and considers activity within the past 24 months. Additionally, VantageScore treats multiple hard inquiries within 14 days as a single inquiry for all types of credit, whereas FICO applies this rule primarily to mortgage, auto and student loans.

What they use to create the score

Here is a breakdown of the primary factors that determine your credit score:

  1. Payment history: This is the most significant factor in your credit score. It reflects whether you have paid your past credit accounts on time. Late payments, defaults and bankruptcies can significantly lower your score. (35% of score)
  2. Amounts owed: This factor looks at the total amount of debt you owe compared to your available credit, known as your credit utilization ratio. High balances comparative to your credit limits can negatively impact your score. (30%)
  3. Length of credit history: The longer your credit history, the better. This factor considers the age of your oldest and newest accounts and the combined average age of all your accounts. A longer credit history provides more data on your credit behavior. (15%)
  4. Credit mix: Having a variety of credit types, such as credit cards, mortgages and auto loans, can positively affect your score. It shows that you can manage different types of credit responsibly. (10%)
  5. New credit: This factor considers recent credit inquiries and newly opened accounts. Opening a lot of new accounts in a short time can be seen as risky behavior and may reduce your score. (10%)

Additional considerations

Depending on circumstances, these factors may also be considered:

  • Hard inquiries: When you apply for new credit, lenders perform a hard inquiry on your credit report. Multiple hard inquiries in a short time can lower your score, as it may indicate financial distress.
  • Soft inquiries: These occur when you check your own credit or when lenders pre-approve you for offers. Soft inquiries do not affect your credit score.
  • Public records: Bankruptcies, tax liens, and civil judgments can severely impact your credit score. These records indicate significant financial distress and can remain on your credit report for several years.

Improving your credit score

Understanding how credit scores are determined can empower you to make better financial decisions and improve your overall credit health. If you have any specific questions or need further details, feel free to consult with an attorney who handles issues surrounding consumer credit.