How Is My Credit Score Created?

Your credit score is a number that tells a lender how good a credit risk you may be. The higher, the better. Scores can range from 300 to 850. A score over 700 is considered “excellent” credit. The exact formula that is used to calculate this score is a tightly-held secret, but we have a decent idea of what makes up your credit.

Only 35% of your score comes from your payment history. This surprises most people as they think that payment history makes up the majority of your score. If you pay on time, your score goes up. If you pay late, or have collections, foreclosures, bankruptcies etc., your score goes down, and quickly. Another 30% comes from the amount of debt you carry compared to your available credit. They like to see your balances at about 30% of your available credit, or less. This may not make sense to you, but your credit score will be higher if you owe $25,000 as $5,000 on 5 credit cards, each with a $25,000 limit than if you owed $0 on 4 cards and $25,000 on one card. The computer model never likes to see you “maxed out” on a credit card, and if you are over your limit, that can especially hurt your credit.

Another 15% of your score comes from the length of time you’ve had your oldest open credit line. They like to see stability. Then 10% comes from the “mix” of credit you have. It’s better if you have a mortgage loan, a car loan, then some credit cards. The last 10% comes from the inquiry on your credit report. I’ve heard that a batch of inquires all within 14 days of each other might be countered as only one inquiry, assuming you may be “rate-shopping”.

BIG TIP – If you are behind on any loans or credit cards, bringing them current will raise your score – BUT, if you pay off an old collection account, that will bring that account up as a “new” derogatory rating and hurt your score. If you are applying for a loan, talk to your lender about the timing of paying this off. preferably AFTER you get your loan.

“Sources REFERRAL REALTY Monthly Newsletter, December, 2007”



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