Infographic: What Goes Into a Credit Score?

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Infographic: What Goes Into a Credit Score?

Infographic: What Goes into a Credit Score?

About the Author: Mike Goldstein is a Content Writer at Credit Karma. Since joining the team in June 2013, he's been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.

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I think Credit Karma should do an article on "What DOESN'T go into your credit score". There's plenty of things people THINK affect their credit score that don't.

How much you owe (other than credit card utilization)

Credit card utilization is a big part of your score. But only the percentage used matters, rather than the amount owed. Assuming all other factors are the same, someone maxed out on a limit of $5,000 and someone who carries a balance of $5,000 on a limit of $50,000, the first person will have a much lower score. The utilization, not the amount owed, is what matters.

And debts other than credit card debt? The amount is completely meaningless. $1 collection and $1,000,000 collection? No difference, as far as your credit score is concerned. A loan on a used car and a loan on a Ferrari? As long as they are both paid on time, the amount you owe doesn't matter. So your total debt doesn't matter to your credit score.

Having too many 'store cards'/'sub-prime cards/credit cards period

There is no negative effect to your credit score for having too many cards. In fact, having a lot of cards can actually add to your score (by increasing total accounts). Furthermore, credit scores simply do not care -who- the lender is, or how difficult a card was to obtain. Assuming the same age, utilization, and payment history, a First Premier card and an AMEX Centurion have the same effect on your score. There is no penalty for having too many "low level" cards, nor is there a bonus for having "high level" cards.

Now, you *DO* lose points for having *NEW* accounts, and for applying for lots of new accounts. So applying for lots of cards at once will hurt your score. But simply *HAVING* lots of cards will not.

Your Income/Wealth

Lenders almost always use income when they determine whether to lend to you or not. But it doesn't affect your credit score! It is very possible to be poor and still have good credit, and it is also possible to be rich and have bad credit (check out Donald Trump). 

Lenders' reasons

Just because a lender sent you a letter stating you were denied for reason x, doesn't mean reason x is reported on your credit report. Here are several reasons I've seen lenders deny credit that aren't on your credit report:

 

  • A 21 year-old charge off (against that specific lender)
  • Credit Limit Increase denied because card "wasn't used enough"
  • Has too much credit
  • Owes too many loans
  • Already has other product (ex: you can only have one paypal credit product, even though they offer 3)
  • Doesn't meet requirements (ex: cards aimed at students will deny anyone who's not a student)

And believe it or not:

 

  • Credit score too high for this product

Yes, predatory lenders have been known for turning down people with 700+ scores, while approving those with 550.

None of these things will lower your score. A 21 year old charge off won't hurt your score, but some lenders will hold a grudge basically forever, nor will not being a student lower your score, or using a card too little. Individual lenders are free to make up any requirements they want. If a lender wants to turn away anyone with a SSN ending in 4, they can. That doesn't mean you have a lower score because of it.

Credit Karma Team
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Thanks for posting!

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The article was very informative and helpful in understanding the areas in which one may need to work on.  My problem is that I have too many credit inquiries on my credit report.  Recently, I bought a car and was shopping for the best deals and now I have 4 hard inquiries on my credit report which is hurting my score.  Over time, I know that the inquiries will dimenish.  Great artlicle!

Credit Karma Team
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Hi Smiley85a,

Glad you enjoyed the infographic! Keep in mind that most score models will count those 4 inquiries as one for scoring purposes, but they must be listed separately on your credit report. You're correct that the impact will lessen over time!

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If the credit companies want you to keep your utiliization below 30% to be considered a good number, why do the credit companies offer you more more credit?  It makes no sense.  If you have a balance of $1,000 (with a credit card that has a max amount available of $3,000), why not just offer to the customer a maximum of $1,000 credit, let it be 100% utilization, who cares - it's the same amount - it seems like everyone is playing games.....

Credit Karma Team
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Thanks for sharing your thoughts!

Reply by
Aloof

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Unfortunately, it really is a game. My opinion is, it requires a bit of forethought on how we spend, and making responsible decisions when spending. Anybody can spend to the limit on a card and then not have the resources to repay the debt. Many will do this, then file bankruptcy in a pinch. That is what makes it hard on the rest of us who want to pay our bills. I went for years not understanding how credit works....now, it makes more sense to me on the hows and whys.

The ones who won't make an effort to understand it will never be recognized as creditworthy to the fullest and will suffer the consequences with sub-standard interest rates on everything. Sure, loans will be given still, but if we think credit scoring is unfair now, just think when you give the lender twice or three times the amount of interest because of a silly fico score! Our score is our bargaining power! We need to learn how to play the game!

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Reply by
Toad004

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The scoring algorithim (usually FICO), not the credit companies, decides your credit score. The credit score basically tries to guess what your odds of defaulting are, and someone with maxed out cards is more likely to default then someone with empty cards. Think about it - someone with empty cards in trouble could use thier cards to get them out, but if thier cards are already full...

Now, the credit companies themselves may or may not care what your utilization is. Some companies will let you sit at 100% and not care, but will drop kick you if you're so much as a day late. Others may slam you with CLDs for daring to use more than half your card, but don't care if you're late. One lender could approve someone with a 612 and decline a 712, because of one negative item the 712 has that the 612 doesn't.

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This article was very informative!  I want to improve my score and it has helped me understand the areas I need to focus .

Thank you!

Credit Karma Team
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Happy to help, SENSEIK8! Best of luck on your path to financial improvement. 

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This article was very helpful and i learned that keeping your usage at least at 30% works

Credit Karma Team
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Glad to hear you enjoyed this article. You're right - credit card utilization is very important! 30% is a great rule of thumb.

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I don't understand why your credit score goes down when you pay off a loan.  Seems to me it should go up because you are taking care of things.

Why do they do it this way.  I have worked very hard to get my score up and then I pay off a loan and it goes down quite a bit.

Credit Karma Team
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Hi Sandylee9225,

It can be discouraging to see your score go down when you finish paying off a loan. The usual reasons for why this happens (reduced age of accounts and change in the "mix" of credit lines) are covered in this article:  https://www.creditkarma.com/article/MyScoreDroppedWhy

Hope that helps!

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Reply by
GoldCredit83

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While it's great to pay off your debts and not owe or pay high interest you should always leave some bait on the hook so to speak have some good debt that your paying over time not all at once I hope this helps. :)

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