Credit Scores: Three Lesser-Known Factors That Contribute to Credit Score Calculations

As mentioned in previous articles, there are 5 main categories used to determine credit scores. The first two categories are credit history and credit utilization. These two categories have already been discussed in the article Credit Scores: Two Major Factors That Contribute to Credit Score Calculations. Now it’s time to learn about the 3 smaller categories used to calculate credit scores.

First, the length of a person’s credit history, which accounts for about 15% of a credit score, helps determine credit scores. This means that it is smarter for a person to establish a long history of open credit accounts than to open and close accounts frequently. For example, if someone had 2 credit cards with a 10-year credit history, it would make a lot of sense to keep these accounts open, even if they are used infrequently, to continue to increase the history and age of these accounts. If a person were to close all their credit card accounts and open new accounts, this could have a very negative impact on that person’s credit scores.

The next contributing factor is the type of credit used, and this accounts for about 10% of the score. It is much better to have a variety of different accounts than to have just one type of account. Some of the different types of credit are credit card accounts, mortgage accounts, car loans or installment loans, retail accounts, etc. Therefore, a good mix of these accounts would be preferable to maximize the credit score. Putting all of one person’s eggs in one basket is never a good thing.

Finally, the last factor that contributes to determining a score is new credit (this also makes up about 10% of the score). This category includes the number of new accounts opened, the time and type of accounts opened, recent credit inquiries and how long ago the inquiries were, and reestablishing good payment history after payment problems. Under this category, a person would not want to have tons of credit inquiries, many new accounts, or many new accounts opened in a short period of time.

Any of these 3 areas mentioned above can greatly influence the overall calculation of a credit score. Therefore, it is very important to make sure you understand how a credit score is calculated to give yourself the best chance of getting the best and lowest financing rates available. Hopefully this will give people a better understanding of the credit scoring system and how these scores are calculated.