What is in a Credit Score?
What is in a Credit Score?

A credit score is a three-digit number used by financial institutions to determine your creditworthiness, or the likelihood that you’ll pay back your debts. When a consumer applies for a credit card, mortgage, student loan, auto loan, or other line of credit, a lender will pull a credit score to help him decide whether or not to extend credit.

There are six key credit-influencing factors that make up your credit score, although the actual credit score number may differ depending on on which credit bureau (Equifax, Experian or TransUnion) pulls the information and what kind of credit score model is used. (Read more about credit score differences.)

Here are the six main factors and how they can impact your credit score.

1) Open Credit Card Utilization

Your open credit card utilization rate is your available credit compared with how much you're using at any given time. It can be calculated by taking your total credit card balances and dividing that number by your total credit card limits. The resulting percentage is your utilization rate.

In a previous article on credit card utilization, Credit Karma collected data from 70,000 credit scores to find out how credit utilization and credit scores correlate. In general, it was found that the lower the utilization rate, the higher the credit score. The one exception is with consumers who have a 0% utilization rate; their scores are generally much lower than those consumers who maintain a utilization rate of 1-30%. For that reason, it's a good idea to use the credit cards you have responsibly and regularly.

It's important to note that your credit utilization rate is not calculated by the balance you carry over from month to month; it is the balance you have at the time that your credit card issuer reports to each credit bureau. Therefore, it is not necessary to carry over a balance from month to month; you need only show regular credit card use.

2) Percent of On-Time Payments

Your percentage of on-time payments represents how often you make loan payments on time. It's a heavily weighted factor in calculating a credit score, so just one or two late payments can significantly affect your score.

Paying bills on time is one of the best ways to keep up good credit health; it shows lenders and creditors that you're reliable and will pay back your debts.

3) Number of Derogatory Marks

These include accounts in collections, bankruptcies, foreclosures, and liens. Your credit score will be severely negatively affected by a derogatory mark on your credit report. Derogatory marks typically take seven to ten years to clear from credit history, and they generally cannot be removed earlier.

A derogatory mark can severely influence your chances of getting approved for credit; it shows a lender that you may have significantly mismanaged credit in the past.

4) Average Age of Open Credit Lines

This piece of your credit score averages the ages of your credit cards, mortgages, auto loans, student loans, and any other lines of credit on your credit report. If your credit history is lengthy, lenders will be able to more accurately assess creditworthiness; they can better assess how you might manage the credit they extend to you.

For this reason, closing your oldest credit card account is typically ill-advised. It will shorten the length of your credit history and reduce your available credit, possibly increasing your credit utilization rate. In a previous article, Credit Karma wrote about when you may want to close an old credit card account, and when to avoid doing so.

5) Total Number of Accounts

This piece of your credit score totals up your number of credit cards, auto and student loans, mortgages, and other lines of credit. Consumers with a higher number of credit accounts generally have better credit scores, since they've been approved for credit by more lenders. Also, having various different types of credit--both revolving and installment--on your profile can positively contribute to your creditworthiness.

However, it's not recommended to open several new lines of credit simply to increase your total number of credit accounts. This factor of your credit score is weighted less heavily than the rest. If you are in the market to apply for new credit, make sure you first read reviews and research which product is right for you.

6) Total Hard Credit Inquiries

The final factor in your credit score is your total number of hard credit inquiries. Hard inquiries occur when a financial institution, such as a lender or credit card issuer, checks your credit in order to decide whether to approve you for a loan or credit card. A hard inquiry will occur when you apply for any of the following:

  • Auto loan
  • Student loan
  • Business loan
  • Personal loan
  • Credit card
  • Mortgage

One hard inquiry will negatively affect your credit score by a few points, but the affect will begin to lessen after a couple of months. Multiple hard inquiries will more significantly impact your credit score, and can communicate to lenders that you are desperate for credit or are unable to qualify for credit. For this reason, it's a good idea to avoid applying for several lines of credit at once.

Conclusion

It's important to know that, while some of these factors are weighted more heavily than others, no one factor works independently of the others. Each one contributes to your overall credit score.

To see how your credit score is being affected by each of these factors, check your free credit report card regularly with Credit Karma.


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Helpful to 86 out of 90 people

It should be noted that Credit Karma's scores are not completely accurate. My TU score on here read 727 only 2 days ago and still does while yesterday when I got prequalified on a home loan the pulled credit report read 750.  The only consolation that I have is that they were wrong in the right direcction. However, it is clear that my scores are very stable 750/751/753, because my balances remain about the same and I don't have very many open accounts. In any case, Credit Karma is a useful tool to get a handle on your debt.

Comment by
Amayama

1 Contribution
86 People Helped
Helpful to 10 out of 10 people

You are correct, Amayama. I actually called TU because while they scored me in the excellent range, and my Vanguard score could not have been higher, my car insurance score was only in the "fair" range. TU gave me the runaround, never explaining how that could be, and then told me that the score Credit Karma posts was not my score.  Really frustrated and amused at way Credit Karma got thrown under the bus.

Who do I believe?

Reply by
minnebrew

2 Contributions
31 People Helped
Helpful to 49 out of 60 people

I appreciate knowing about the diviance in scores. I still wish there was a system more fair to seniors. I have one credit card that I pay off every month and never charge more than 20 percent of its limit. My house, vehicle, etc. are all paid for. I spend very little as I need little. I have been frugal all my life and now I find a credit score of 673. I don't owe a soul and am very careful with my money. I just don't understand why I am penalized for that. If anyone has an answer to that I'd certainly like to hear it. Thank you.

Reply by
JohnDeere1953

3 Contributions
77 People Helped
Helpful to 1 out of 1 people

I had a score 819 several months ago and now that I check my srore It's 774. Nothing in my accounts have change for several years. You guys have got it all wroung.

Reply by
mrecae45

1 Contribution
1 Person Helped
Helpful to 31 out of 32 people

I am totally amazed at the credit rating agencies.  They have independent power and are not responsible to anyone.  In 2010, my FICO- II score dropped 30 points in four months, and I didn't do anything but pay my bills.  No new credit, etc.  FICO's response was that they changed their algorithm. 

Today, my TransUnion new score is 775 out of a possible 850; my Vantage score is 990 out of 990; my auto score is 905 our to 950; and my home score is 912 our of 950.  All scores computed from the same database on the same day.  Why the variances? Use of different algorithms.  Who controls the algorithms?  The rating agencies.  What can you do about it----nothing! I filed a complaint against the rating agencies in 2010 to the FTC, and to date, they have acknowledged receipt but have not responded.  They are not going to repond.  The rating agencies run wild.

I don't need new credit.  I am 73 years old, and have assets.  However, I do pay auto and home insurance each year and not having my home and auto scores maxed-out affects what I pay for home and auto insurance each year.  Probably costs me several hundred dollars for my private residence and rentals.

I repeat, the credit rating agencies have more power over your financial life than you can imagine, and they report to no one.  Not one government agency will get involved in the algorithms used by rating agencies.  It's their call.  Not even the new Consumer Protection Agency will touch this subject.  I know.  I tried to get them involved. 

Read and weep.

"The Big Kahuna"

Comment by
JAllanAT

1 Contribution
31 People Helped
Helpful to 8 out of 9 people

Your right. There is no one algorithmic that will work unless every agency that reported information such as payments received new lines of credit. Etc etc. on a daily basis. 

It vertually impossible. 

And since there isn't a central bank there is no telling what info is available to anyone at any given time. 

Top Contributor

Reply by
EddyTX

375 Contributions
704 People Helped
Helpful to 4 out of 5 people

Wow!! Thanks a lot for these accurates info's. wow!! 

It's amasing how this systhem works. It's them against us.

Lord have mercy on us!

Reply by
abrakadabra1966

1 Contribution
4 People Helped
Helpful to 67 out of 76 people

This was very helpful.  Thanks!

Comment by
credit1337

1 Contribution
67 People Helped
Helpful to 19 out of 22 people

So when you payoff a mortgage or any bill, your score suffers? Proof that the credit score is an artificial construct designed to keep people from becoming financially independent. If not, when you payoff a bill, your propensity to payoff obligations should increase your score by 100+ points, and only being a day late and a $ short should have only the slightest effect upon your score. Credit bureaus are BS artists.  The same goes for Zoning classifications.

Comment by
d00dled00

1 Contribution
19 People Helped
Helpful to 27 out of 33 people

Why is there not a separate scoring system for senior citizens who have worked hard to have house, car, etc. paid for and don't use credit cards very often simply because we have no reason to do so?

Comment by
JohnDeere1953

3 Contributions
77 People Helped
Helpful to 30 out of 30 people

Since the system does lower your score when you have paid off mortgages and such a couple of ways to keep your score healthy is to make this work in your favor. 1. Reward cards will pay you for using. Charge utilities, gas, groceries, drugstore purchases and make one payment to the card. This way you show the usage without spending more and the bank will pay you. 2. Take out a home equity loan, you only pay if you use it, generally have no upfront costs and home loans have more importance to credit.

Reply by
Barlow1968

2 Contributions
30 People Helped
Helpful to 22 out of 25 people

I totally agree. I am going back to Experian and try to add trade accounts from years ago to render my reports "less thin".  For some reason, Equifax keeps old accounts longer than the others.  Equifax is extremely easy to work with by phone rather than online.  To be fair, they all three are.  I am 70 years young and plan to get a new mortgage for a home in Florida and I am making this credit experience my full time job to get my score as high as possible.  Who knew????

Reply by
howard3100

8 Contributions
660 People Helped

i agree with you , my house is paid for and so is my vehicle and for some reason i guess they expect us to get new to keep a good credit rateing .. why should we have to do that when we busted our butts to have what we do have . give us our good credits scores for what we have paid for .and our insurace scored should be based on our driving record. i have never been in a accident or gotten a ticket but they have me a poor . that bull crap.

Reply by
alabamabrat

1 Contribution
0 People Helped

I'm on the same tractor as JohnDeere1953 is, but my score is 768... down from 780.  The older you get, and the more you prove youself... the lower your score is.

Reply by
SMITTEN

1 Contribution
0 People Helped

I have a similar problem. I am 51 years old. I just paid of my home (did 15 years mortgage). I don't have a car payment. I only have on Credit Card ( $5,000 line of credit). My balance is always under $100.00 . Didn't have a need to check my credit in the last 10 years and eventually when I did this year my score was only 682  

Reply by
Yardee

2 Contributions
0 People Helped
Helpful to 8 out of 9 people

I payed off 3 credit cards from Capital One and my credit score dropped by 10 points.  I don't understand this system of scoring.  It seems the more you stay in debt the higher your score is.  If you pay off credit card debt your score drops, just saying., what sense does that make?

Comment by
jef768

1 Contribution
8 People Helped
Helpful to 0 out of 1 people

wow, i appreciate your post!  I was considering opening a Capital One card to IMPROVE my credit-I have not utilized a credit card in over 10 years but I have an extensive amount of medical bills and some utility bills from when I had a heart attack in 2007.  So Capital One is not the way to go right?!  Any suggestions?  Hopefully helped in Florida.

Reply by
Lanaswiggum

2 Contributions
0 People Helped
Helpful to 6 out of 8 people

I always thought that taking care of business included not having debt.  However, there are so many ways that banks use our money and credit to make money, which includes our credit card debt, savings, loans, etc., that I often think that I would be better off without them.   Even creditkarma is doing the same thing...notice how many cards and services that they want us to jump on--all in the name of providing a service that they want you to need.  They get paid for the advertisement and soliciation of our information and hopefully our business, which will make them money.  They all seem to sell our information, aka known as pimping, to make money, sell our mortgages, our credit information, all while they are thriving from these tranactions.  The proof is in all of the "random" e-mails and solicitations that I receive from which I did not choose to contact.  I wish I could follow just one dollar bill in the hands of my banking/lending intstitutions to see who holds it, who owns it, who abuses it and who makes money.  I'm sure that I am NOT THE ONE making money.  What ever happened to a good man/woman's word?  Do you think that my credit scores will drop because of this comment?  Do I lose points if I vote for the wrong candidate?

Comment by
punky555

1 Contribution
6 People Helped
Helpful to 5 out of 7 people

If not for them selling something we would not get a free creit score.They have to make money some way and that is the way on most web sites.Advertising.

Reply by
boo127tx

4 Contributions
11 People Helped

I see your point but I am actually grateful for their suggestions.  I expands my knowledge and my options when I follow up with any/all suggestions. Grateful in Florida

Reply by
Lanaswiggum

2 Contributions
0 People Helped
Helpful to 1 out of 1 people

FICO scores are absolute BS. The fact that in all your years you have never had a late payment makes no difference. Also balances shown in the report are very old.

Comment by
uncleed37

1 Contribution
1 Person Helped
Helpful to 1 out of 1 people

Very interesting. It is good to read the comments and different situations others have encountered. It is helpful and allows me the tools to research and possibly make better decisions. Thanks.

Comment by
ksandrews

1 Contribution
1 Person Helped
Helpful to 8 out of 12 people

i am so confused...if i pay cash for items to keep from using credits cards; i may not be able to make on-time payments on monthly ...thats a poor decision on my part...but being in debt...is a good thing.

Comment by
pjj1964

1 Contribution
8 People Helped
Helpful to 3 out of 3 people

It's all part of the financial game. 

If you don't owe you don't play. 

Reality is that you have to understand how finance works. Not high finance. Personal finance. 

It's not really that hard but it does take a little time. And you have to pay attention to how you spend your money. 

Bit it can be done fairly easily. 

Read some of the info here. It's a great start.  Good luck. 

Top Contributor

Reply by
EddyTX

375 Contributions
704 People Helped
Helpful to 3 out of 3 people

not to much,not to little.

Reply by
boo127tx

4 Contributions
11 People Helped

The key is to not over-utilize your credit cards (under 30% of available credit utility). To use more tells creditor you are a risk, that you may not have enought money for your expenses or you are spending more money than you are bringing home.

Use cash and credit responsibly.  Spend only what you know you can pay on your next payment. The creditors just want to see people sitting on a pile of money, using their cards is dangling a savory treat in front of their faces, so to speak. That is what they want. When they get an idication that you want to spend and pay late, or over-utilize, that is a risk, bad investment.

Reply by
tengallonhat

1 Contribution
0 People Helped
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