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What Affects Credit Score

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Mark Cappel
UpdatedSep 13, 2010
Key Takeaways:
  • Five factors impact your credit score.
  • The biggest impact on your credit score is your payment history.
  • Income is not a factor in scoring your credit.

What factors affect my credit score? If I co-sign a loan will that hurt my credit score?

What can affect my credit score? I.E. shopping around for car insurance? Co-signing for a family member?

There are five key factors that go into calculating your credit score, with certain items carrying more weight than others. The factors are as follows:

1. Payment history

Payment history counts for approximately 35% of a score. It is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area.

If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

2. Total debt and total available credit

Total debt and total available credit counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred.

If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently.

You mentioned co-signing a loan. There are two main effects. First, it will appear on your credit report, much like any other debt. If payment is late, for instance, that derogatory notation will appear on the your credit report, lowering your credit score. This can happen well before the co-signer has any idea that there is a problem, as the co-signer does not often receive a monthly billing statement.

Secondly, because the co-signed loan shows on the co-signer's credit report, it may prevent the co-signer from obtaining credit because it alters the co-signer's debt to income ratio, even if all payments are made on time on the co-signed loan.

Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt-to-credit limit ratio low.

3. Length of positive credit history

Length of positive credit history counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments.

4. Mix of types of credit

Mix of types of credit counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

5. New credit applications

The number of new credit applications you have recently completed accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

While you cannot calculate your own credit score accurately, you can review your credit report for on the five factors named above to get an idea of whether the accounts listed on your credit report are hurting or helping your credit score. You can then take action to improve any potential problems, such as paying down your balances or paying off collection items.

Generally speaking, if you are carrying more than $5,000 in credit card debt or are struggling with credit card or revolving debts, you should solve this problem first. If you are interested in applying for help with one of Bill's approved debt help partners, click here: Debt Help.

Items not in a FICO score

Factors such as age, sex, income, and length of employment have no direct affect on your credit score, and are not considered when the bureaus calculate your score. Keep in mind that for most lenders, your credit score is only one aspect, albeit an important one, of your overall "credit worthiness," meaning the creditor's view of your ability to repay a loan.

Your income, for example, is not considered in the calculation of your FICO score, but most lenders will ask what you earn to analyze your ability to repay the loan. Even if you have an 800 FICO score, if your income is only $10,000 per year, a lender will probably not loan you a large sum of money, because despite your exemplary credit habits as measured by your FICO score, the lender will surmise you lack the means to repay the loan.

Credit score range: What is a good FICO score?

FICO scores range between 300 and 850, with the average U.S. credit score being 723.

According to Fair Isaac, a credit score above 700 places you in the low credit risk category (perfect or "A" credit), meaning you should qualify for the best interest rates, depending on other factors such as income. A score between 690 and 600 is considered a moderate credit score, and many people say you are "Alt-A" if you are between about 650-680. This means that while you will not receive the best interest rates, you should still be able to borrow at reasonable rates.

A score below 600 generally means that you will be considered a relatively high credit risk, and your interest rates will probably be quite a bit higher than a consumer with a better credit score. A score below 550 is generally considered poor credit; a score this low will likely prevent you from obtaining many loans, and those you can obtain will carry high interest rates and fees.

There are several other scoring models, such as the Vantage Score and the Beacon score, which lenders use when making loan decisions, so the ranges mentioned above are not absolute. However, Fair Isaac is the most common scoring model, so the information I provided should serve a good guide.

I hope this information helps you Find. Learn & Save.