How your credit score is calculated
Your credit score is calculated using an algorithm based on five factors. The most recent derogatory items on your credit profile have a bigger impact on your credit rating than older derogatory accounts. The mortgage industry will take your mid credit score to grade your loan worthiness. Your “mid score” is the middle score from the three credit bureaus. The highest, and lowest scores are not used, for example if your credit scores are 602, 630 and 655, your mid score is 630.
Payment history is 35%
Lenders are most concerned about whether or not you pay your bills. The best indicator of this is how you’ve paid your bills in the past. This includes late payments, collections and bankruptcies. Even though you have filed a bankruptcy and those collection accounts are shown to be included they still count against your score. The more recent the delinquencies are the more they are factored into your score, 70% of your score is based on the past two years of your credit profile.
Total amount of debt owed is 30%
This includes debt such as your car loan, personal loans and credit utilization. Your credit utilization ratio is the balance you are carrying on revolving account vs. the credit limit. The higher your credit utilization, the lower your credit score will be. Most people tell you to keep your balances at 30% of the limit on your credit cards. This is considered a decent credit utilization ratio 30%, but 0% utilization ratio is better and your score will be higher. Most people tell you 30% no lower, your credit score is an algorithm, the lower your balance the lower the utilization rate the higher your score will be.
Length of credit history 15%
The longer your average length of time you keep accounts open and your first trade line make up 15% of your score. Never close a revolving account, keep them open forever if you can.
Mix of credit is 10%
Having different kinds of accounts is favorable because it shows that you have experience managing different types of credit lines. Having a few revolving trade lines and installment loans with good payment history has a positive impact on your score.
Inquiries are 10%
Each time you make an application for credit, an inquiry is added to your credit report. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble. While inquiries can remain on your credit report for two years, your credit score calculation only considers those made within a year. You do have a grace period for rate shopping where multiple inquires for certain types of loans will only count as one inquiry. You get a 30 day grace period for a mortgage, 14 days for an auto loan. When shopping for a loan or a new car, you can apply with as many lenders as you want just keep within the timeframe allotted.