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The Credit Scoring Mystery

December 15, 2014 By: Great Midwest Bank

How your credit score is calculated is like the secret formula for Coke –  the average consumer doesn’t really know!

However, FICO has provided five categories that are considered when determining a credit score.

Payment History: 35%
Length of Credit History: 15%
Amount Owed: 30%
Types of Credit: 10%
New Credit: 10%

What follows is a short synopsis of each category:

Payment History

Notice that this category holds the most weight. It looks at late payments. Thirty days late is not as significant as 60 to 90 days late. It also looks at the last time the payment was late—the more time that passes, the better. They also consider how many times a payment has been late. Let’s say you’ve made 56 payments on time, with only one of them being late — that has less impact than if you’ve made 56 payments and 12 of them were late.

Length of Credit History

While the percentage is on the lower end of the scale, it still matters. They consider when you first started using credit, the number of accounts, and how long you’ve had them. If you’ve just started using credit, it’s possible to still obtain a good credit score, but everything else has to be positive.

[How to Build Credit When You’re Just Starting Out]

Amount Owed

If there are high balances or credit cards have been “maxed out,” the credit scoring formula figures that it is a greater risk and the credit score will be lowered. As a side note, closing a credit card account – or paying an old collection – that currently has an outstanding balance can actually HURT your credit score.

[Debt-to-income Ratios Explained]

Types of Credit

This is one of the areas driving credit score confusion because the scoring models do not reveal what “mix” of credit helps or hurts a credit score. Typically, they are looking for auto loans, the number of mortgages loaned, installment loans and credit card accounts, and whether those are “balanced” versus having 5 car loans and no credit cards.

New Credit

Opening new accounts is not a bad thing, but it may hurt a credit score if a person applies for a lot of credit in a short period of time. They consider how many accounts were applied for, how many new accounts were opened, and over what time period the new accounts were opened. Inquiries (meaning if you were shopping for the best rate for a car loan and talked with 5 banks, same for a mortgage in a 30 day window) do not have as much impact as if you applied for 5 different credit cards.

If you’d like to know more about credit scoring, visit If you’re thinking of starting the home buying process, contact your local loan officer to discuss the home mortgage process.