What determines your credit score? - First Internet Bank

How is Your Credit Score Determined?

By First IB on April 4, 2016

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One number, between 300 and 850, has a great deal of influence over your financial future: Your credit score (sometimes referred to as your FICO score). Your credit score is a numeric rating of your creditworthiness that influences the rates you’ll pay on everything from credit cards and auto loans to mortgages and insurance. It can even be used in employment and security screening.

Almost everything you do every day that has to do with money contributes in some way to your score. With so much on the line, it’s important to keep your credit score in tip-top shape!

There are more than 40 consumer credit reporting agencies in the U.S. that track and verify information about everything from your employment history, to your payment record as a renter or tenant, to your driving record, to your use of credit. Many of these companies are subsidiaries of the “big three” credit history reporting agencies (Experian, Equifax and TransUnion), who, according to the Consumer Financial Protection Bureau (CFPB), collect information and supply reports to lenders. The information collected includes:

  • How much credit you have
  • How much credit you use
  • Information from debt collectors
  • Public information like bankruptcies, liens and judgments

It’s virtually impossible to trace your score back to a set of specific information. But if you missed two rent payments a few years ago, that could have an effect. Or if you defaulted on your student loans 10 years ago, that could also impact your score. The point is, we only know generally how the information reported about you filters down to a single report and determines your credit score.

When you apply for a loan, about 80% of lenders order what’s known as a FICO “tri-merge report” — your credit score and credit history as reported by each of the big three credit reporting bureaus. The information can vary and report on different things on each report, so the tri-merge report combines the information into a single summary which includes your credit score from each bureau.

FICO reports that this score is based primarily on five weighted categories:

  • Payment history (35%) – Your track record of on-time (or not) payments for all kinds of credit accounts.
  • Amounts owed (30%) – The number, type and amounts of credit owed or available, and remaining balances on installment loans.
  • Length of credit history (15%) – The age of your oldest, newest and the average age of all accounts and when you’ve used them.
  • New credit (10%) – The number of newer accounts, time since opening them, number of credit requests and recent lender credit inquiries.
  • Types of credit used (10%) – Used primarily for people with a limited credit history. Takes into account the overall number of credit card accounts you’ve used and whether they are revolving or installment accounts.

Other items that will positively impact your credit score:

  • Pay your bills on time, every time — and don’t miss payments. Making on-time payments month after month is one of the best contributors to a good credit score.
  • Avoid having lots of cards with small balances. Using one or two cards for everything is more favorable than making small charges on several cards.
  • Manage the amount of revolving credit you have vs. what you’re actually using. The lower the amount of revolving credit (credit that doesn’t have a fixed number of payments), the better for your credit rating.
  • Keep “good” old debt on your report. Having a longer history of debt that has been satisfactorily paid is good for your score.
  • Apply for credit sparingly. Your credit score can take a hit every time you apply for credit, and having a large number of new credit accounts can also decrease your score.

Understanding where your credit score comes from, how it’s calculated and how it’s used in making lending and other big decisions is very important to your financial well-being. As always, feel free to call us at 1-888-873-3424 with any questions or if we can assist you in any way.

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