What Goes Into Your Credit Score?

Credit limit

Knowing what your score consists of goes a long way in improving your score.

Your credit score ranges from 300 to 850. Most VA lenders require a credit score of 620 or higher. Although the exact formula for calculating the score is proprietary information and owned by FICO, here is an approximate breakdown of how your credit score is formed:

Payment History (35%)

Thirty-five percent of your score is based on your payment history. This is mainly for lenders to see the risk involved with giving you a loan, checking how well you have paid your bills in the past. Your score will be affected by paying bills late, not paying bills at all, how many bills have been sent to collection agencies, and if you filed bankruptcy in the past. Like anything, it takes time for these to go away and can affect your score for years after they have taken place.

Amounts Owed (30%)

Thirty percent of the score is based on how much debt you currently have. This involves the utilization rate. Your utilization rate is the ratio of how much credit you have to how much you have used. To keep this from affecting your score try to keep your credit card balances below 25 percent of their credit limits.

Credit History (15%)

Fifteen percent of your score is based on how long you’ve had credit. Banks are more willing to lend to those who can show a more complete payment history.

New Credit (10%)

Ten percent of the score is based on new credit. Opening new credit accounts negatively affect your score for a very short time. This 10 percent also includes inquiries. Keep in mind that there are two types of inquiries, hard and soft inquiries. A hard inquiry is you giving a lender permission to submit your information for a loan, and can negatively affect your score if there are multiple hard inquiries in a short amount of time, while a soft inquiry is purely informational and has little to no effect on your score.

Types of Credit in Use (10%)

Ten percent of the score is based on the types of credit you already have or have had in the past. Having different credit accounts shows you have experience with credit.

It is always important to remember what goes into your score and how your actions can affect the score. It is also a great idea to check your credit report at least once a year to check for fraudulent charges and identity theft.

Photo thanks to Robert Scoble under a creative commons license from Flickr.