Understanding the Credit Score

1 - What is a Credit Score?2 - 5 Factors that Impact Your Credit Scores3 - Why are my Credit Scores Different?4 - How Long Can Negative Accounts Report?

What is a Credit Score?

The credit score represents the lending risk factor. The FICO score range is 300 to 850.

The credit score is the result of an algorithm that predicts the statistical chance of a consumer going 90 days late or more on a particular loan obligation over the next 24 months.

For example:

  • Above 800 = there is a 1 in 1,485 chance a consumer will go 90 days late on a loan obligation
  • 720-799 = 1 in 649 chance
  • 680-719 = 1 in 112 chance
  • 620-679 = 1 in 47 chance
  • Below 620 = 1 in 15 chance

A 740 and above is considered a “prime” credit score by most lenders. With this in mind, better credit scores mean less risk to lenders and often better rates on loans and credit cards for the consumer.

5 Factors that Impact Your Credit Scores

  • Payment History contributes 35%, so be sure to pay your bills on time!  Just 1 new late payment or collection could lower your credit scores 60 to 100 points.
  • Credit Utilization (balances on credit cards, line of credit, etc) contributes 30%. It’s best to maintain $0 balances and the creditor will still report a good payment history. Just make sure to use the card to make a small purchase every 4-6 months to keep the card active.
  • Average Age of your credit files contribute 15% toward the credit scores.  As your active credit files “age”, your credit scores will grow.
  • Mix of Credit contributes 10% toward the credit scores. The credit scores prefer a few credit cards reporting along with an installment loan (such as an auto or student loan) and a mortgage loan.  It’s not necessary to have a mortgage loan to have good credit scores.
  • Hard Credit Inquiries impact the credit score by 10%. Hard inquiries occur when you actually apply for credit. Checking your scores online is a “soft” inquiry and does not impact the credit score. A hard inquiry can remain on your credit report for two years; however, inquiries over the last 90 have the biggest impact on your scores.

Why are my Credit Scores Different?

There are several reasons why the credit scores can vary between the three credit reporting agencies (TransUnion, Equifax and Experian).

  • The most common reason for lopsided credit scores is that banks, creditors and collection companies are not required to report to all three credit reporting agencies. In fact, some creditors (usually small community banks) do not report at all.
  • Some collection companies only report to one credit reporting agency. This means that two credit reports may produce a much higher credit score, while the third report may produce a much lower score.
  • Unfortunately, the same can be said about creditors reporting your good information. A creditor may report your good payment history to just one credit bureau, but not the other two and this does not help your scores.
  • Finally, there may be errors reporting on one or two reports and not the third report.

How Long Can Negative Accounts Report?

  • Late Payments (30–180 days) can stay on your credit report 7 years from the date of the initial missed payment. It will have the biggest blow on the credit score at first and then have less of an impact as the late payment ages.
  • Collection Accounts can remain on the credit report for up to 7 years from the date of the original delinquency. When a collection account is paid in full, it will be marked “paid collection” on the credit report.

Many consumers believe that once an unpaid collection reaches 7 years, the collection will fall off the credit report and they will no longer owe the debt. This is half true. The account may no longer report, however the debt is still owed. The unpaid account may be sold to a different collection company and they may start reporting the account again to the credit bureaus.

  • Charged-off Accounts can remain 7 years from the date of the initial missed payment that led to the charge-off (the original delinquency date), even if payments are later made on the charged-off account.
  • Closed Accounts may or may not have a zero balance. Closed accounts with delinquencies remain seven years from the date they are reported closed, whether closed by the creditor or by the consumer; however, delinquency notations will be removed seven years after the delinquency occurred when pertaining to late payments.
  • Bankruptcies: A Chapter 7 Bankruptcy can remain for 10 years from the filing date. Chapter 13 remains seven years from the filing date. Accounts that were included in bankruptcy will remain seven years from the date they were reported as included in the bankruptcy.
  • Judgments (paid or unpaid) can remain on the credit report 7 years from the date the judgment is filed.
  • City, county, state, and federal tax liens (unpaid) can remain 15 years from the filing date. Paid tax liens can remain 7 years from the date the lien was paid.
  • Inquiries can remain on the credit report for 2 years; however, only those inquiries in the last 90 days have the greatest impact on the credit score.

Some inquiries, such as employment or pre-approved offers of credit, will show only on a personal credit report pulled by you.

The credit score does allow for “rate shopping”. Example; mortgage, auto and student loan inquiries count as 1 inquiry if multiple inquiries are done within a 30 day period.