Bankruptcy & Foreclosures

Let’s face it, most of us realize that our credit score is a unit of measurement that determines where we stand in terms of being able to borrow money but how many of us really know what determines our credit score? Let’s start with the basics and then dig in to the nitty gritty- A credit score is a three-digit number that basically attempts to predict how efficiently you’ll pay your bills. The score ranges from 300-850 and is calculated using your credit history information contained in your credit report.

Past payment history accounts for 35% of the credit score. Lenders are obviously concerned about whether or not you pay your bills. A great indicator of your risk level is to look at how you’ve paid your bills in the past. Late payments, collections, and bankruptcies all affect the payment history of your credit score. More recent delinquencies hurt your credit score more than those in the past.

DTI (or debt to income ratio) accounts for 30% of your score. The amount of debt you have in comparison to your credit limits is known as credit utilization. The higher your credit utilization – the closer you are to your limits – the lower your credit score will be. Keep your credit card balances at about 30% of your limit or less.

Length of credit history is 15% of your score. Having a longer credit history is favorable because it gives more information about your spending habits. It’s good to leave open the accounts that you’ve had for a long time.

Inquiries are 10% of your score. Each time you make an application for credit, it’s added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your FICO score calculation only considers those made within a year.

Mix of credit is 10% of your score. Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

Understanding how your credit score is calculated is the first step in being able to take action to improve it. For more information, I recommend checking out LaToya Irby’s helpful About.com article.