According to Fair Isaac Corporation, almost 90 percent of banks in the U.S. use your credit score to determine whether — and how much — credit to give you. Credit scores range from 350 to 850, and the higher your score, the more likely you are to receive lines of credit and loans with favorable interest rates. Each credit bureau may have a different score for you based on information reported to that bureau, but the overall formula for determining the score is generally the same.
Your payment history on your accounts determines 35 percent of your credit score. Paying your bills on time and as agreed improves your score; paying late or not at all can reduce it. The payment history score is influenced by any delinquencies, how long accounts have been delinquent, the amount past due, the number of items past due and any other negative information, such as liens, collection items, bankruptcies and judgments.
The amount of money you owe to creditors determines 30 percent of your score. The credit bureaus factor in how much you owe in proportion to how much overall credit you have available; the lower your balances in relation to the credit available the better. Maintaining credit card balances close to the limit will negatively affect your score. The number and type of accounts that have balances also influence your score; a mortgage balance affects your score less than a credit card balance, for example.
Length of Credit History
The length of your credit history is also factored into your credit score. The credit bureaus look at how long your accounts have been open by account type. The amount of time since account activity has been reported on the accounts also influences the score.
Opening multiple new accounts can affect your score as well. Ten percent of your credit score reflects new credit inquiries. The number of inquiries and the time between inquiries are factored into the score. However, if several inquiries of the same type appear in a short period, such as several auto loan inquiries within one 30-day period, the affect on your score will be minimal. In addition, opening new accounts to re-establish a positive credit history can improve your score over time, if you use credit responsibly.
Types of Accounts
Your overall credit mix, or the types of accounts you have, makes up 10 percent of your credit score. The credit bureaus take into account whether your debt consists of loans, credit cards, mortgage debt or other types of accounts, and each account type is weighted differently when calculating your score.
An adjunct instructor at Central Maine Community College, Kristen Hamlin is also a freelance writer on topics including lifestyle, education, and business. She is the author of Graduate! Everything You Need to Succeed After College (Capital Books), and her work has appeared in Lewiston Auburn Magazine, Young Money, USA Today and a variety of online outlets. She has a B.A. in Communication from Stonehill College, and a Master of Liberal Studies in Creative Writing from the University of Denver.