How is a Credit Score Determined?

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  • Written By: Niki Foster
  • Edited By: Sara Z. Potter
  • Last Modified Date: 15 August 2018
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A person's credit score is extremely important, as it determines his or her eligibility for all kinds of financial endeavors, such as credit cards and home loans. Some people have difficulty adjusting their scores because they are not sure what the number is based on. A specific formula is used to determine the score, and it's based on whether the person pays bills on time, how much debt he or she has, the length of his or her credit history, how many new accounts the person has, and the diversity of the credit accounts. Knowing what criteria go into the number on a credit report can help a person maintain a good score and qualify for higher limits and better rates on loans.

A credit score may be anywhere from 300 to 850, with 300 being the most risky and 850 the most secure in the eyes of lenders. Therefore, a higher number will qualify an applicant for a better loan rate. A person with a number under 500 is unlikely to be able to secure any type of loan.


The Fair Isaac Corporation, or FICO, which determines credit scores, uses a specific formula to come up with the number. Being aware of this formula can help people keep an eye on their credit. The most important factor is whether or not the person pays his bills on time, which accounts for 35% of the score. The longer a person pays his minimum balance on time for each credit card or loan that he has, the higher his credit score will be. Since this factor accounts for the largest portion of the number, it should be people's main priority.

The difference between a person's total credit limit and total amount owed is the next most important factor, making up for 30% of the total. The less credit a person uses out of the amount he has available, the better he will look to the credit bureaus. Financial experts often recommend that people do not charge more than 50% of the limit on each of their credit cards.

The length of a person's credit history accounts for 15% of his credit score. For this reason, cancelling credit cards can lower the number. People who do not want to use a card anymore may do better by cutting it up without canceling the account. If a monthly or annual fee is charged to keep the account open, however, canceling may be the better option.

The remaining 20% of a credit score is equally divided between new accounts and applications for credit and the diversity of credit types the person has. Too many new accounts and applications at one time result in a lower number, while more diversity of credit types makes for a better score. A mix of credit cards, retail cards, and loans that are paid in regular installments will help boost the last 10% of the score.


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Post 6

@jmc88 - Good advice. What I had to do when I got my first car loan was have a parent co-sign. I didn't have bad credit, but I didn't have good credit just because I hadn't had a chance before. Getting a parent to co-sign makes creditors less weary of your debt.

You alluded to it, but it's also not a good idea to pay off a car loan really fast if you're wanting to build credit. Like was mentioned, the length of your credit history plays a role. If you can pay off a car loan in 12 months that's great, but biting the bullet and paying extra interest to stretch the payments out 24 to 36 months will

be better. That's still assuming you're wanting to raise your credit score and not just keep good credit.

The other thing that hasn't been mentioned that I recently learned goes into the credit score is requests for credit. That's why it's not a good idea to immediately try to get another credit card if you've been denied one already. Wait a few months instead.

Post 5

@Emilski - It sounds like you are already ahead of the curve. Having a credit card in college can be a great start to good credit if you use it responsibly. I have seen a lot of people who get way into debt before they even get a job, because they don't use their credit card intelligently.

As far as keeping a load on the card, I've always been advised against it. The trick is that, although there's a generally idea how the FICO score works, no one knows for sure. I think it's generally accepted that having no debt is better than very low debt.

The alternative to this is having a long term loan like for a

car or mortgage. Since you're in college, it's probably not a good idea to get a car loan unless you have a steady full-time job. You probably have student loans to consider, as well. Once you get older, though, getting a car loan is a good idea. Making regular payments on that for several years shows creditors that you're timely and responsible enough to handle larger debts.
Post 4

I found this article really helpful. I just got a credit card last year when I started college, and I have been looking for a lot of ways to raise my credit score. Up to this point, I have been paying off the balance every month, but I have heard different strategies about this. Some people, along with the article, say it's good to have credit cards with no debt on them. I have heard other sources say that it's best to carry a small load (less than 10% of your credit limit) every month. What should I do?

I want to make sure I have the best credit score possible, but I don't want to have to be paying interest on the things I am buying. I am also looking for other ways that I can raise my credit score without getting another credit card. Does anyone have suggestions?

Post 3

@concaf - Like anon15669 said, as long as you eventually do pay off the debts, it will have a positive effect on your credit score. Obviously, it's always best not to let debts go to collection in the first place, but some things can't be helped.

Like was also mentioned, making agreements with the creditors is always a good idea. The way collection agencies work is that they buy debt at a reduced price from lenders with the hope that they'll be able to get you to pay it back. That is why they are so persistent. Since they didn't pay full price for the debt, they're often willing to negotiate a price where everyone benefits.

In reality, they are only able to collect for a certain percentage of people in the end, so someone responsible like you who is actually willing to settle your debts is their dream customer. Take advantage of it.

Post 2

Yes, paying off debts is always a good idea. Before paying off any debts, contact the collector and ask if they would be willing to do a Pay-for-Deletion. Most collector's are more than happy to remove something from your report if you pay off the debt. If they don't agree to that, the next best thing is simply to ask them to 'settle'. If you pay a settlement, it will then show up as a 'legally paid as agreed' on your report.. which isn't as good as straight deletion, but it will look much better than having a current collection.

Remember, all items (other than Bankruptcy or Judgements) will only stay on your report for 7 years. If some are from 2002, that means that many of them will fall off of your credit within the next 18 months. (When they are deleted is the same month they were reported)

Post 1

How much does paying off items in collection go to raising score?

I had financial difficulty from 2002 to now, and had about 6 items totalling $8,000 (credit-cards, cell-phones) sent to collection agencies.

If I pay each of these off in full, will that raise my score significantly?

Secondly, can I request to have these items removed if they have been paid in full? Do I want to (is it better to show paid debt then none)?

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