What’s in a Credit Score?

What exactly is a credit score and what’s used to create that score?  A credit score is a statistical representation (guess) if you will pay bills on time based on past history of payments and how much credit you use on a regular basis.  A few days back I posted about credit score and is it relevant. I didn’t explain what is actually in a credit score. For the average consumer, having credit limits of 10K+ is simply not needed; these consumers won’t use credit limits that high.  Unfortunately, to succeed in the credit score game these high limits are needed.  The general rule for credit utilization is to keep credit card balances to less than 40% of available credit.  This means if you have a COMBINED credit availability on credit cards of 10K; keep the amount of credit used to below 4K at any one time.  Since we do not know for 100% certainty when the different credit card agencies report to the credit reporting agencies (CRAs) try to never be above this limit on your credit cards.  Remember, this is combined usage and combined limits.

Credit Score Range

A credit score is somewhere between 300-850; the higher the number the better the credit and the smaller the risk of that borrower defaulting (or so the theory goes). Personally, I believe the way credit scores are calculated is not relevant to today’s credit system especially with the rise of strategic defaults on mortgages and other credit obligations.

What’s NOT in a Credit Score

Some people believe that every bill is reflected on their credit reports; its not. Here is a short list of what is not included as part of your credit report: cell phone bills, electrical bill, property taxes, federal income tax, water bill, cable bill, internet and other utility type bills.  The exception to this rule is when any of these companies get a judgement against you for a past due amount;  judgments can be reported on your credit reports (but are fairly easy to get deleted as court clerks don’t validate).  If utility bills are not part of your credit report then how exactly is a credit score calculated?

What’s in a Credit Score

A credit score involves: payment history, amounts owed, length of credit history, how much new credit, and types of credit used. My Fico says:

Payment History

• • • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
    • Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
    • Severity of delinquency (how long past due)
    • Amount past due on delinquent accounts or collection items
    • Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
    • Number of past due items on file
    • Number of accounts paid as agreed

Amounts Owed

• • • Amount owing on accounts
    • Amount owing on specific types of accounts
    • Lack of a specific type of balance, in some cases
    • Number of accounts with balances
    • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
    • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History

• • • Time since accounts opened
    • Time since accounts opened, by specific type of account
    • Time since account activity

New Credit

• • • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
    • Number of recent credit inquiries
    • Time since recent account opening(s), by type of account
    • Time since credit inquiry(s)
    • Re-establishment of positive credit history following past payment problems

Types of Credit Used

• • • Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Please leave your comments or questions below regarding your credit score.  As always, I am available via email or telephone for questions.  I am not an attorney and this is not legal advice.