How Credit Scores Are Determined

Services for Real Estate Pros with Credit, Wealth & Success Coaching


Many consumers know their credit score number, but few understand how scores are determined. As we noted yesterday, algorithms assign weighted values to five key financial factors to derive credit scores. By addressing these five factors, credit repair professionals can help consumers repair their credit and rebuild their credit scores. Having already covered payment history and credit report inquiries, we complete our discussion today.


Debt-to-credit ratio. Potential creditors look for a healthy balance between current outstanding debts and available credit, such as unused credit card limits, home equity and bank credit lines. For example, if you have charged $2,500 on a credit card with a $5,000 limit, your debt to credit ratio is 50%. However, if you max out your credit card, that ratio jumps to 100%.  FICO recommends that consumers keep their credit balances well below 30%.


Some of the most common errors consumers make in attempting to manage credit card debt include:


    * Carrying a high debt load (debt used divided by available credit) is counted as a serious negative in computing credit scores. Minimum credit card payments are calculated to cover interest without reducing debt principal. Consumers who only make minimum credit card payments never reduce their debt load.

    * Closing credit card accounts you are not using can hurt your credit score. While closing an account does not remove that credit history from your credit report, it does remove any good history associated with the account from being considered in determining your credit score. Lenders place a high value on demonstrated timely payment history. Closing credit accounts also hurts you by decreasing the available credit used to compute your credit score by the amount of the credit line provided by the cancelled card, effectually increasing your debt load.


Length of credit history. A long history with creditors reflects positively on your credit score. The greater the average age of your accounts, the more favorably lenders will view you.


Types of credit accounts. A broad range of credit accounts with a preponderance of high-value accounts can improve your credit score. Mortgage loans receive the highest ranking, followed by installment loans on major purchases (cars, furniture, etc.), then major credit cards with retail cards (department stores, gas stations, etc.) receiving the least consideration.


A credit repair professional can review your financial picture and show you how to improve your credit score.

Don Wixom
RE/MAX Executives Nampa, ID - Nampa, ID
"Looking out for your next move..."tm

Jennifer, this is great info! I will look back at your other posts & see if there is more info I can learn. Thanks!

Nov 03, 2010 04:54 PM
Eileen Liles
970-216-0530 - Cedaredge, CO
Macht-Liles Real Estate Group - Cedaredge, CO

Good post, Jennifer.  That debt-to-income ratio has never been more important....

Nov 03, 2010 04:56 PM
Jennifer O'Brien
Credit, Wealth & Success Coaching - Fair Oaks, CA

You are welcome! Have a blessed day!

Nov 03, 2010 04:58 PM
Praful Thakkar
LAER Realty Partners - Burlington, MA
Metro Boston Homes For Sale

Jennifer, great to know the difference between knowing the number and understanding that number.

Great informative post.

Nov 03, 2010 05:56 PM