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Analyzing the Categories that Make Up Your Credit Score


Numerical breakdown for a credit score.

What is a credit bureau? A credit bureau refers to an organization that gathers financial data that scrutinizes the creditworthiness of borrowers. There are three primary bureaus: Equifax, TransUnion, and Experian. They collect financial data and they sell this information to lenders such as banks and credit unions so that the lender can determine the creditworthiness of borrowers.  


Complex financial calculations create a creditworthiness score for borrowers. These calculations are generated by credit scoring models that include FICO and VantageScore. FICO Score and VantageScore conduct risk assessment. These organizations use data within consumer credit reports to determine credit scores for individual borrowers.


Both systems use a creditworthiness score that ranges from 300 to 850. How they arrive at these scores varies. The primary difference stems from the level of influence applied to the various categories. FICO determines creditworthiness by focusing on five categories: (1) payment history; (2) credit utilization; (3) length of credit history; (4) types of credit in use; (5) new credit.


• Payment history comprises 35% of your FICO score. This percentage demonstrates how consistently you pay your debts. Timely payments will boost your score; however, defaults or late payments will negatively impact your creditworthiness.


• Credit utilization makes up 30% of your FICO score. This percentage measure your balance-to-limit ratio on your credit cards, home equity lines of credit (HELOC) and personal lines of credit. Keep this percentage around 10% to 30% to secure effective interest rates.


• Length of credit history constitutes 15% of your score. This category demonstrates that you have managed your debts over some given amount of time. A long history with a certain type of debt, such as a credit card, demonstrates to lenders that you have an established history with paying your debts. 


• Types of credit in use comprise 10% of your score. Lenders like to see that you are able to handle diverse credit products such as credit cards, personal loans, auto loans, and mortgages. This category illustrates how well you manage a range of financial obligations.


• New credit makes up 10% of your credit score. If you open several credit cards in a short amount of time, lenders will get the impression that you are cash poor. This is a red flag indicator. Borrowers need to be aware that hard credit pulls by lenders lower their credit score several points.


What is the purpose of VantageScore? According to experts, VantageScore allows consumers to establish credit history early in their credit life. VantageScore generates a credit score with only a month of credit reporting. On the other hand, FICO requires six months of credit history with at least one credit account reported to the credit bureau in the last six months.


Nine of the 10 largest banks reference VantageScore when determining creditworthiness, according to one study. Furthermore, 29 of the 100 largest credit unions also reference VantageScore. VantageScore uses six categories to determine at a credit score. Here are the indicators: (1) payment history; (2) depth of credit; (3) credit utilization; (4) recent credit; (5) balances; (6) available credit. All of these categories are assigned a weighted percentage.


• Payment history constitutes 41% of your score and demonstrates to lenders the capacity of borrowers to meet their obligations. Does the borrower pay their debts on time? Timely payments constitute a primary responsibility for borrowers.


Credit utilization makes up 20% of your score. This category looks at the percentage of total credit card limits you are currently using. Are you nearing your credit limits on your credit cards? Lenders like to see this ratio around 10% to 30% of the total credit card limit.


• Depth of credit consists of 20% of your score. This category measures the age of an account and the credit mix that measures your ability to manage different forms of debt such as credit cards and auto loans. This is similar to the types of credit measured by FICO.


Recent credit constitutes 11% of your score. VantageScore focuses on the number of credit accounts you’ve recently opened. Whenever you apply for a loan or a line of credit, lenders run a hard inquiry that shows up in your credit report.


Balances create 6% of your score and this variable considers the sum total of all of your debts. This could be a red flag that indicates you are overextended. Your debt-to-income ratio could be high. A 36% debt-to-income ratio is acceptable when searching for credit. The lower the better.


• Available credit makes up 2% of your score. VantageScore calculates the total credit you have on revolving credit accounts such as credit cards and home equity lines of credit.


People in underserved communities sometimes have low credit scores and they need to establish credit through alternative methods such as becoming an authorized user on someone else’s credit card or asking landlords to report their on-time rent payments to credit bureaus. These borrowers can be the target of predatory lenders who use deceptive, fraudulent, or discriminatory means to gain access to their money.


Predatory lenders make it difficult for borrowers to repay their debts. How do consumers determine the difference between legitimate lenders and predatory lenders? Predatory lenders offer inflated interest rates with a short maturity date. Some predatory lenders include a financial penalty for paying off their mortgage before the maturity date of the loan. Federal law minimizes prepayment penalties on most mortgages.



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