Southern California Mortgage Blog

What Makes Up A Credit Score

Credit scoring is made up of a complex mathematical formula. There are many, many variable bits of information that go into a score.

A lot more is known about what does not go into a score than what actually does.

The score is only reflective of the information contained in it. It does not consider ethnic group, gender, religion, marital status or nationality. It does not consider your sexual orientation, medical history, or nationality. These are, in fact, prohibited from use in scoring by United States federal laws.

It does not include how much money you make, what your interest rates are on any of your credit cards, installment loans, or home loans.

If the credit bureau does not have credit information, then that information is not included in that company’s credit scoring.  This is one reason the different companies may have varying scores. 

A person’s overall credit profile will determine the importance of the following factors:

Thirty-five percent (35%) of a borrower’s score is determined by their track record. The Payment History shows how they have handled credit in the past, if they have paid promptly or slowly, and if there are any judgments, tax liens, collections, wage attachments, etc. 

30% of the score is based on how much the borrower owes. How much is too much? Owing a great deal of money on many accounts may indicate that a person is overextended and this can lead to slow payments or no payments. 

15% of the score is based on the length a borrower’s credit history can be documented. Consumers who have had use of credit for only 10 years or less are considered “newbies”. 

10% of the score is based on the recent activity and new accounts. Inquiries occur if new accounts have been added, if you have applied for new credit, or if you are “shopping” different companies for credit. 

Lastly, 10% of the score is reflective of the types of credit in use. A healthy mix would be a real estate loan, car loan, and a few credit cards with remaining credit available on the accounts.

People who know the rules of credit will get better rates and service. Most of us need to perform regular maintenance on our reports. As necessary as regular exercise for your body, it is also essential for good credit fitness. In today’s credit market, you will save thousands and thousands of dollars on your home loans and other borrowing options.

Closing Credit Accounts

Unfortunately, there is always advice going around that may not be the best in your personal situation. Or advice that is out of date.  In most cases, it is not a good idea to close any credit card accounts. A big portion of your credit scores are based on your credit history. When you close a credit card account, you cut yourself off from that history.

The credit scoring models look at it as though you believe that you can’t handle having all those accounts open. The urge to ‘Charge! Charge! Charge!’ is more than you can handle so you must close the accounts. While this works for me as far as keeping cookies in the house, it doesn’t work for your credit cards.

Unless you are closing that account to keep a mean and vengeful “ex” from charging up the accounts again; hang on to those credit cards!

I want you to become devoted to those charge cards! Grow old with them! If they are more than five to seven years old, they may not contain a clause called Universal Default. This paragraph will switch you to the very highest rate on your credit card if you are late on any account.

A common thread with those consumers with credit scores over 800 is that they all have credit card accounts that are over 25 years old. Wisely using those old-time credit card accounts over the years will build your credit score significantly.