Credit Score

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised when you discover that the scores they generate for you are different.

What factors are considered in your score?

The following are just a few exmaples:
Current balances on accounts: Accounts showing all payments were on time are positive.
Length of time accounts established: Long-established accounts are positive
Bank revolving accounts: Lack of accounts, or too many can be negative.
Reported delinquencies: Negative, especially if severe and recent.
Number of accounts with balances: Too many credit card accounts may have a negative effect on your score.
Number of finance company accounts: Loans from finance companies may negatively affect your credit score
Recent payment history: An insufficient credit history may have an effect on your score, but that can be offset by other factors, such as timely payments and low balances
Proportion of balance to your credit limit: If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score
Number of recent inquiries: Not all inquiries are counted. Inquiries by you, or creditors who are monitoring your account or looking at credit reports to make "prescreened" credit offers are not counted.
No recent (non-mortgage) account balance information: Can be negative when seeking mortgage loans
Legal item filed or collection item reported: Negative, effect decreases with time.
Accounts not paid as agreed and/or legal item filed: Your score will be affected negatively if you have paid bills late, had an account referred to collections, or declared bankruptcy
Employment and residency: Longer time in your job and at your residence can help your score.

How much weight each of these factors has on your score is not disclosed to consumers because it causes more confusion than insight into the credit scoring process. Everything in credit scoring is relative -- one negative item can have a small or large impact on your score depending on your credit history. If you have a long and seasoned history of credit and many established accounts,one late payment would have a small impact on your score. However, if you have a short credit history,one late payment would impact your credit history much more. If you have no established credit, you will have no score. Credit scoring requires that you have at least one account that is older than six months and have at least one account that has been reported to the credit bureau in the last six months (this could be the same account).

Your score should be affected less if you have late payments on minor credit lines versus major ones. For example,if you are delinquent on a gas or department store account,and not on a mortgage or auto loan,your score should not be affected as much as it would if you are delinquent on an auto loan. Your credit score should be stronger with credit cards than mortgages since statistics show that credit cards are more indicative of paying on a loan than a mortgage is (most people will pay on their mortgage no matter what,and let credit card payments slide).Paying on a secured card should affect your score more than payments on department store cards.

A typical scoring model may also consider your job or profession for stability, and how long you've lived at your address.

Please note that:

A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor will determine a score.
The importance of any factor depends on the overall information in one's credit report.
Your score only looks at information in your credit report. Lenders look at many things when making a credit decision, including your income and the kind of credit you are applying for.
Your score considers both positive and negative information in your credit report. Late payments will lower your score, but having a good record of making payments on time will raise your score.
Your score does not consider your ethnic group, religion, gender, marital status and nationality. These are, in fact, prohibited from use in scoring by U.S. law.

FICO: most widely used credit score

FICO scores are by far the most commonly used credit score model. A FICO score is the method that many lenders use to determine whether to accept or reject your mortgage application as well as setting fees and rates.

Listed below are the five main categories of information on a credit report that Fair, Isaac scores evaluate, along with their general level of importance.

Payment History - What is your track record?
The first thing any lender would want to know is whether you have paid past credit accounts on time. This is also one of the most important factors in a credit score. An overall good credit picture can outweigh one or two instances of, say, late credit card payments. By the same token, having no late payments in your credit report doesn't mean you will get a "perfect score."
Amounts Owed - How much is too much?
Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make some payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile.
Length of Credit History - How established is yours?
In general, a longer credit history will increase your score. However, even people with short credit histories may get high scores, depending on how the rest of the credit report looks.
New Credit - Are you taking on more debt?
People tend to have more credit today and to shop for credit - via the Internet and other channels - more frequently than ever. Fair, Isaac scores reflect this fact. Research shows that opening several credit accounts in a short period of time does represent greater risk - especially for people who do not have a long-established credit history.
Types of Credit in Use - Is it a "healthy" mix?
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. The credit mix usually won't be a key factor in determining your score - but it will be more important if your credit report does not have a lot of other information on which to base a score.

For more detailed information on Fico score, go to FICO Score page.