Credit Scores Demystified

If you’ve made a resolution this year to get your credit on track, getting started can feel a bit daunting. After all, it can sometimes seem as if credit agencies want to keep you in the dark about how scores are calculated. Not to worry – with some diligence on your part and a little insight into the world of credit score-keeping, you can get back on track in 2020.

Credit scores follow an algorithm first developed by the data analytics company FICO years ago. For a while, credit scores weren’t the primary force behind a credit decision but over time the impact of a credit score became more and more important. Most every loan program available today has a minimum credit score.

There are five characteristics of your credit history that make up your three-digit score: your payment history, account balances, the length of your credit history, the types of credit used and how often you’ve applied for new credit. Credit scores will improve much more quickly by paying attention to the two categories that have the greatest impact on a score: payment history and account balances.

Payment history accounts for 35 percent of the total score. When someone makes a payment more than 30 days past the due date, scores will fall. An occasional “late pay” won’t do much damage to your score but continued payments made more than 30 days past due definitely will. Preventing late payments is a key to recovering your score.

Account balances compare outstanding loan balances with credit lines and make up 30 percent of your score. If a credit card has a $10,000 credit line and there is a $3,300 balance, scores will actually improve, as the ideal balance-to-limit is about one-third of the credit line. As the balance grows and approaches or exceeds the limit, scores will begin to fall.

The remaining three have relatively little impact. How long someone has used credit accounts for 15 percent of the score, but there’s really nothing anyone can do to improve this area other than to wait. Types of credit and credit inquiries both make up 10 percent of the score. By concentrating on payment history and account balances, scores will improve significantly over the next few months.