Your credit scores affect many important aspects of your life. From the moment you open your first charge account, you enter into the world of credit.


Why A Credit Score Is A “Snapshot”

Each consumer’s behavior changes over time and when a lender or insurance company makes an inquiry into a person’s risk profile, they get a “snapshot” of that individual’s situation because it constantly changes.

Each time a consumer opens a charge account their score changes. Each time a consumer misses a payment on a credit account, their score changes.

When a consumer pays off a debt, their score changes again. Over time, the exact number goes up and down a thousand times. What’s important to understand is where a person’s credit score is at any given time and what can be done to increase that score.

FICO – The 800-Pound Gorilla

The main source of information for many credit scoring companies is a company known as “FICO”. FICO stands for Fair Isaac Corporation.

This company started using formulas for calculating credit risk back in the late 1950’s and became the model after which the other three companies took their lead.

FICO uses a proprietary formula to calculate the likelihood of repayment for every person with a credit history. Even though the exact formula isn’t known, we do know what the credit score factors are.

Credit Score Factors: FICO’s Formula

The information included in a credit report is provided by creditors to each of the three bureaus, who pay for the information. The data is incorporated into an individual’s credit history and that information is then used to determine the credit score.

Each area of credit information is given different weights when calculating the credit score. The following list details, in general, what percentages of a credit score are calculated for the information submitted:

  • 35% Payment history
  • 30% Outstanding debt
  • 15% Length of credit history
  • 10% New credit information
  • 10% Credit mix

FICO score chart

Payment History – 35% of the Credit Score

As the largest portion of the formula, the payment history on an individual is extremely important. Late payments, missed payments, underpayments and other issues related to making payments on accounts are all incorporated into this section of the credit score.

Some creditors report late payments as soon as 10 days after the payment was due to their offices. Others wait until two payments have been missed before forwarding the information to the credit bureaus.

For this reason, it’s important for consumers to understand how each of their creditors reports data to the credit bureaus so they can better manage their accounts with each company.

Outstanding Debt – 30% of the Credit Score

As debt accumulates, the balances are closely monitored by the credit bureaus. Each person has a limit to how much they can borrow. That limit is determined by consumers themselves. If you take out a credit card and run up a $5,000 balance, then pay that balance off, you have proven your ability to service the debt.

However, if you take out a credit card and run up a $5,000 balance and only make the minimum payment each month, you’ve demonstrated to the credit bureau you can only pay a small portion of the total debt and you receive a lower credit score as a result.

The total amount of outstanding debt (the money you owe) is calculated against the total amount of credit available (unused credit that can be used) and that information is combined with the other data to calculate the credit score.

If you make minimum payments on accounts and add additional credit cards in your name, the unused portion of those credit limits will help boost your credit score until you start using up the available credit, at which time the balances will begin hurting your credit score.

Length of Time with Credit Accounts – 15% of the Credit Score

How long you keep an account is a factor in calculating credit scores. The longer you stay with a creditor, the higher your score will be. What becomes important is paying off balances and NOT closing accounts.

It is important to pay down the accounts and keep them open. This results in an improved credit score because you have a long relationship with your creditors and you have available credit to draw on.

The best thing to do when paying off a credit card or credit account is NOT to close the account. Keep it open and it will help your credit score stay as high as possible.

Also, using the same financing resource over and over again for different loans also helps this part of the credit score. In other words, financing three different cars with the same bank or credit union over the years will help your score.

New Credit Information – 10% of the Credit Score

Opening new accounts and the activity on those new accounts is a factor in the scoring formula. New credit, as opposed to older accounts, indicates you have the ability to open up new lines of credit. This is important; it means your financial situation is positive because creditors are willing to loan you money or finance your purchases.

It also means you are active financially and not sitting still without acquiring and financing anything. Credit bureaus like people who buy things and pay for them over time. It is ironic to consider that if you made every purchase with cash and never financed anything, your credit score would be very low, despite the fact you can afford everything you purchase.

Type of Credit – 10% of the Credit Score

When you finance your home purchase with a mortgage, that is a loan. When you open up a credit card, that is a loan. When you receive an account which you can charge gas or groceries to, those are also loans. They are all loans, but they are different kinds of loans. Mortgages are a form of financing that is different from a credit card. This difference is important to the credit bureaus.

Having different types of credit accounts lets the credit bureaus know you are able to handle different kinds of financing. Installment agreements (like car loans), revolving lines of credit (like department store credit cards), and other types of financing help you achieve a higher credit score by demonstrating your ability to handle the different types of credit lines.

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Put it All Together and You End Up with a Credit Score

There are other factors which affect your credit score. For most people, the number for their credit score is between 500 and 800. The lower the number, the less attractive you are to potential lenders.

Tax liens, bankruptcies, judgments, and other negative items can seriously affect the credit score number. Collection accounts, charged-off accounts, and other forms of financing failures also have a negative effect on your credit.

The credit bureaus take all the information they accumulate, run it through their unique formulas, and the end result is the number. This number changes frequently with the passage of time and many items, both positive and negative, will cease to be included over time.

Positive items remain and have value for a limited time, but negative items can remain on credit reports and affect a credit score for a long time. For this reason, it is important to review your credit reports regularly and take steps to eliminate negative information and enhance the positive data.

The Big Three Credit Bureaus

There are three main consumer credit reporting agencies in the United States – Equifax, Experian, and TransUnion. Without getting into a lot of historical information and research, suffice it to say these three provide their data to their customers for a fee.

Their data is about what you owe, who you owe it to, how long you’ve owed it. Each company computes and calculates credit scores using their own “secret” formula, but the fact is they all base their formulas on the same criteria as the big boy on the block – FICO.

Good, Bad, and Places In-Between

Because of constant fluctuation of about 20 points around an average score, consumers should try to be aware of where their credit score sits and what can be done to increase the number as high a level as possible.

Good credit means consumers pay lower interest rates on loans, get cheaper insurance coverage and have improved job opportunities.

A good credit score saves money, provides better rates and can even help get a really good job. Bad credit means the opposite to the above will occur and more. Bad credit affects lifestyle and opportunity.

No one wants a low credit score that’s the result of bad credit actions, but they happen and in today’s economy, they happen more and more frequently.

How to Raise Your Credit Score

Bad credit scores can improve through the diligence of the consumer using good credit habits, making payments on time, not over-borrowing, and maintaining low credit balances in their credit accounts. It can take time, but there are solutions to increase your credit scores.

You can choose to learn the credit reporting laws and dispute negative items on your own or you can have a credit repair company do it for you.

Credit repair involves a process of challenging, validating, and verifying the accuracy of information contained in each of the three main consumer credit rating bureau’s data. Only the data which helps the score stay high is retained and the bad information which lowers a credit score is eliminated.

Credit Score FAQs

What is a FICO score?

The FICO score is a branded credit score developed by Fair Isaac Corporation. Most lenders use the FICO score. A FICO score can only be purchased through

If a consumer purchases their credit score from anywhere else it is not their FICO score. Each of the consumer credit bureaus has their own version of a credit score. Equifax calls its score BEACON, Experian – PLUS, and TransUnion – EMPIRICA.

Why are the credit scores from each credit bureau different?

Each of the three credit bureaus – Equifax, Experian, and TransUnion – uses a slightly different formula calculation to come up with a credit score.
In addition, each bureau has different information included in the credit report. Not all creditors report to all three bureaus, so one or two of the credit reports might contain account history the others don’t.

How is the credit score calculated?

A consumer’s credit score is calculated using five pieces of information:

  1. Payment history
  2. Debt level
  3. Age of credit
  4. Mix of credit
  5. Credit inquiries

Will multiple loan applications hurt a credit score?

The short answer is – it depends. If a consumer shops for a loan within a 14-day period, their credit score will probably be safe. Depending on the type of lender, the time frame could increase to as much as 45 days. Most credit scoring models have been designed to recognize when a consumer is rate shopping and avoids penalizing them.

For example, the most recent FICO scoring formula ignores all mortgage or auto loan inquiries made within a 45-day window. Older versions of the FICO score used a 30-day or 14-day window.

Once the “window” has passed, loan inquiries are bundled together and treated as one inquiry. Whether (and when) a credit score will be influenced by rate shopping depends on the credit scorer.

Does closing a credit card help or hurt a credit score?

It’s more likely that closing a credit card will hurt a credit score than it will help. If the credit card has a balance, the credit score will definitely drop after a consumer closes the card. That’s because 30% of the credit score is based on credit utilization – the amount of available credit being used.

When a credit card is closed, there is no available credit, so the credit utilization calculation goes up to 100% immediately. As a result, the credit score drops. Even if the credit card has a zero balance, the total credit utilization – which considers all credit card balances and available credit – is better because there is unused credit available.

If other credit cards have balances of over 30% of the credit limit, closing a single credit card could hurt the credit score. Also, if a consumer has no other credit cards, or their only other cards are store credit cards (and they are closing a major credit card), their credit score could drop.

The mix (or type) of credit is 10% of the overall credit score and looks for the consumer’s experience with different types of credit products, including both credit cards and loans. Please note, closing the oldest credit card could impact the credit score in terms of credit age (15% of your credit score) as well as credit utilization.

How often does a credit score change?

A credit score is like a snapshot picture. A consumer can check their credit score one day with one of the credit bureaus and notice that it’s moved up or down from the previous day.

A credit score can change daily depending on how often the credit report is being updated. Creditors, lenders, courts and others are continuously making updates to credit reports throughout the month and the resultant credit score will change to reflect those updates.

Will a prepaid credit card improve a credit score?

No. Prepaid Credit Cards are not credit cards (they’re more like VISA-branded debit cards), and they’re not listed on a credit report.

A secured credit card, on the other hand, requires a deposit similar to a prepaid credit card, but purchases don’t take away from your deposit. Instead, you’re required to make payments on your balance because it’s an actual credit card. Certain secured credit cards are listed on a credit report and can improve a credit score if used correctly.

Credit Repair Options

Consumers can attempt to repair their credit on their own, however, the process is rather complicated. It involves challenging information contained in each of the three credit bureau’s databanks, verification of debt from creditors and other time-sensitive procedures.

If not done properly, it can actually result in a lower score rather than the hoped-for higher score.

Most consumers turn to a credit repair company which can perform the intricate tasks associated with repairing credit with greater control and higher success rates.

The Best Credit Repair Option

Among the hundreds of companies offering credit repair services, there’s one company which stands out from the others. They have 28 years of experience dealing not only with the credit bureaus, but also with the multitude of creditors submitting information to the bureaus.

They also have hundreds of thousands of satisfied clients. Check out our review of Lexington Law to find out more about them.

Lexington Law Helped This Client Remove Charge-Offs from His Credit Report:

charge offs removed from credit report

This client’s credit scores have dramatically improved since there are no longer any negative accounts on his credit report. Here is a snapshot of his credit scores since signing up with Lexington Law:

my credit scores

Lexington Law Client Testimonials:

“Because of the awesome work you guys did, I was able to get both myself and my wife new cars (well, almost new) and to think, a year or so ago, I couldn’t get anything almost new without unreal interest and all that.

I have recommended your services to all of our friends and family and will continue to do so in the future. Now my wife is in the process of working with you to get her credit cleared up. I couldn’t be any happier. Thank you.”

— M.F., Lexington client

“I have to admit I was a little skeptical at first, but after seeing what you were able to do with my credit after only a few months, it is very reassuring. Thank you for everything that you are doing for me and please pass on to your staff my appreciation for all of the hard work.”

— T.B., Lexington client

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