How credit scores are determined

Category: Credit

Shot of an attractive woman using her tablet to pay her bills online

There is so much that relies on that three-digit number that is known as your credit score. Poor credit can make it difficult to qualify for small loans, such as low-limit credit cards, or larger loans, such as mortgages. In some situations, poor credit can even affect certain job opportunities, and it can also affect your insurance rates. Good credit habits certainly help to improve your score, but did you know that there is a specific formula for how your credit score is broken down, and some things count more towards your score than others? The following is how consumers’ credit scores are determined:

Payment habits

When it comes to what influences your credit score the most, it isn’t how much debt you’re in, or how much available credit you have—it falls on your payment habits. In fact, this makes up a whopping 35 percent of your credit score, which is why it is so important to be timely with your payments, even when it comes to small payments for those low-limit credit cards. Late payments, or accounts that are seriously delinquent (over 90 days past due) can significantly bring down your credit score, so it’s crucial to get into the habit of always making timely payments. Aside from credit score implications, consumers who have fallen way behind on loan and credit card payments face other serious consequences, such as tax liens, repossession, judgments, and having their accounts turned over to debt collectors.

How much you owe

Another big part of your credit score is calculated based on how much debt you’re in. This part of the formula will also look at your credit utilization. For example, if someone has $500 of credit card debt but their only credit card has a $500 limit and it’s maxed out, this is bad for that person’s credit score. On the other hand, if someone else has $500 of credit card debt, but their credit card limit is $5,000, then this is a very low credit utilization rate. Always try to stay well below your limit; if you do come close to maxing out any of your credit cards, pay them off as soon as possible. If the new billing cycle starts and your credit utilization is still high, you’ll likely see a drop in your score.

How long you’ve had credit

The longer you’ve had credit, the better for your score, and this is based off of your oldest account. This is why it can be a good idea to keep a certain credit card account open, even after you’ve paid it off. If your other accounts were opened much more recently and you close out a very old account, you may see a drop in your score.

The types of credit you have

If you’re looking for a boost in your credit, try mixing up the types of accounts you have. Credit diversity is another important part of your credit rating, and can make up for 10 percent of your overall score. So if you just have credit cards at the moment, for example, consider getting an auto loan if you’re in the market for a new car.

Credit inquiries

Whenever you apply for loans or credit cards, a hard inquiry is made and hard inquiries will bring your score down. Although the drop in points is usually minor and temporary, it’s important to avoid frequently applying for credit and carefully consider all applications first. Too many attempts at obtaining credit, especially in a short time, can make lenders wary of approving you.

Remember that any types of negative items, from charge-offs to bankruptcies, to judgments and debt collections, will have a serious influence on your credit rating. If you have any negative items on your credit report, you may be able to get them removed by resolving the issue. If you’re unable to pay off a past due account in full, you may be able to settle the debt for less than what you owe. Otherwise, negative items will usually remain on a consumer’s credit report and affect a credit score anywhere from 7 to 10 years, depending on the specific item.

Do you need help paying off past due debts? If you’re receiving long-term payments from a structured settlement or annuity, we may be able to help get you your cash sooner. Contact us today to learn more about selling future payments for a lump sum of cash.


Nothing above is meant to provide financial, tax, or legal advice. You should meet with appropriate professionals for such services.

Tags: applying for credit, Credit Score

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