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Understanding Credit Scores: A Guide by O1ne Mortgage
Credit scoring systems like the FICO® Score and VantageScore® analyze your credit report to predict your likelihood of repaying debts. These systems use advanced algorithms to evaluate your credit history for signs of good and bad credit management habits.
While the exact calculations behind credit scores are trade secrets, the factors they consider are publicly known. Below, we outline the key factors and their weightings for the FICO® Score, which is used by 90% of top lenders. Adopting the habits described here can help improve any credit score derived from credit report data.
Factors That Determine Credit Scores
1. Payment History: 35%
Making debt payments on time every month is the most significant factor in your credit scores. Even one late payment can harm your scores, and more severe issues like collections, foreclosures, or bankruptcies can have long-lasting effects. Payment history accounts for about 35% of your FICO® Score.
2. Amounts Owed: 30%
The total amount you’ve borrowed and the portion of your available credit in use affect your credit score. Your credit utilization ratio—the percentage of your total borrowing limit you’re using—is a crucial factor. Paying off high-balance credit cards can quickly boost your score once the payment is reported to the credit bureaus.
Credit Utilization Rate Example
| Credit Limit | Balance | Utilization (Balance/Limit) |
|---|---|---|
| $6,500 | $1,600 | 25% |
| $4,800 | $1,500 | 31% |
| $8,000 | $1,300 | 16% |
| Total: | $19,300 | 23% |
Individuals with the highest credit scores tend to keep their utilization rates below 10%. Utilization rates of 30% or higher can negatively impact scores. Paying down higher balances can lead to quick score improvements.
3. Length of Credit History: 15%
Experience with credit accounts generally leads to better debt management. The FICO® Score evaluates the age of your oldest and newest credit accounts and the average age of all your accounts. Closing accounts in good standing doesn’t immediately cancel out their ages for credit history calculations. Length of credit history accounts for about 15% of your FICO® Score.
4. Credit Mix: 10%
Managing multiple debts and different credit types benefits your credit scores. Credit scoring systems favor a mix of installment debt (like student loans, mortgages, car loans) and revolving accounts (credit cards). Credit mix comprises about 10% of your FICO® Score.
5. New Credit: 10%
New debt can increase the risk of falling behind on existing debts. Hard inquiries—entries on your credit report when a lender processes a credit application—can slightly lower your score. However, rate shopping for installment loans is seen positively, and multiple inquiries within a short period are considered as one. New credit accounts for about 10% of your FICO® Score.
Frequently Asked Questions
- How Do I Check My Credit Score?
- Can Service Accounts Impact My Credit Score?
- What Can Hurt Your Credit Scores?
- How Can I Improve My Credit Score?
- What Can I Do if I Don’t Have a Credit Score?
The Bottom Line
Understanding the factors that influence credit scores helps you see the connection between your behaviors and your scores. While some factors are beyond your control, you can make choices today that affect your credit scores relatively quickly. Adopting good credit habits and sticking to them is key to steady credit score improvement.
For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.
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