Creditors use credit scores, typically ranging from 300 to 850, to determine whether or not you're an acceptable risk before issuing you credit. The higher your score, the less of a risk you are. Creditors obtain scores from credit bureaus, which compile your credit information for quick and easy analysis. The three most commonly used are Equifax, Trans Union and Experian, each of which uses their own credit scoring models.
Equifax's model produces the Beacon credit score and is based solely on the credit data available in the Equifax system. Although it considers the same information the Fair Isaac Corporation uses to calculate its FICO credit score, the Beacon score doesn't always weigh these factors the same.
Both the Beacon and FICO score base a large percentage of its score on payment history. In fact, it represents 35 percent of each score. Each account listing on your credit report discloses how many times you have paid on time, as well as when you were late or missed payments altogether. Your credit report also discloses when non-payment resulted in an account going to collections or was charged off as a loss by the credit issuer. If your payment problems led to foreclosure, bankruptcy, tax lien, court judgment or wage attachment, these are reported on your credit report as a public record. The more late and missed payments on your report, the more your payment history devastates your credit score. Public records and charge-offs have the most severe impact.
The amount you owe to creditors is the second most important factor in the calculation of your credit score. It is 30 percent of your Beacon and FICO score. This portion of your score takes into account how you're using your credit by looking at how many of your accounts are carrying a balance, what your credit limit is on credit cards and how much available credit is left, and how much you've paid down any loans you have. For example, if you have a credit card with a limit of $5,000 and balance of $25, this is treated positively in calculating your credit score. On the other hand, carrying a balance of $4,500, leaving only $500 available, hurts that number.
How Credit Used
Fifteen percent of your Beacon score is devoted to the different types of accounts you have and how you use them. Creditors want to see a good mix of account types in your credit file, from revolving accounts like credit cards to installment accounts like student and mortgage loans. Your FICO score devotes only 10 percent to this activity.
If you have opened new accounts recently, this also will be factored into your credit score. It represents 10 to 12 percent of your Beacon score and 10 percent of your FICO score. The greater the number of new accounts opened within a short window of time, the more your credit score suffers, because you are perceived as a higher credit risk.
Duration of Credit History
How long you have had credit in your name also makes a difference in your credit score. The lengthier your credit history is, the better. For example, if you and John Doe have the same account types and payment histories, but your oldest account is 20 years old and John's is five years old, your credit score likely will be higher. Length of credit history is 5 to 7 percent of your Beacon score and 10 percent of your FICO score. Your score also takes into account the length of time your newest account has been open and how recently you have used all of your accounts.
- My Fico: Understanding Your FICO Score
- Consumer Federation of America: Your Credit Scores
- Fair Isaac Corporation. "What is a Credit Score?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Who Uses Credit Scores?" Accessed Oct. 11, 2020.
- VantageScore Solutions, LLC. "Free Score Providers." Accessed Oct. 11, 2020.
- Fair Isaac Corporation. "What's In My FICO Scores?" Accessed Oct. 11, 2020.
Based on the West Coast, Mary Jane Freeman has been writing professionally since 1994, specializing in the topics of business and law. Freeman's work has appeared in a variety of publications, including LegalZoom, Essence, Reuters and Chicago Sun-Times. Freeman holds a Master of Science in public policy and management and Juris Doctor. Freeman is self-employed and works as a policy analyst and legal consultant.