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Credit Report & Credit Score; Credit Repair, Debt Management > Credit Score > Understanding the Factors that Affect Credit Scores

Understanding the Factors that Affect Credit Scores

By Ruth Racey
Published: Tuesday, December 8th, 2009

The three credit bureaus, TransUnion, Equifax, and Experian, do not just pick random numbers and call them credit scores. These ratings are derived using highly complex statistical formulas to ensure accuracy and reliability. With the financial lives of millions of Americans at stake, the credit bureaus cannot risk reporting wrong scores.

To make sure that credit scores accurately reflect the credit standings of consumers, the credit agencies make use of several factors and aspects to paint a clearer picture. These factors give creditors and lending companies a clear picture of how an individual has fared in his or her finances. This allows financial institutions the freedom to assess potential applicants and clients and determine whether they are worthy of credit or loans.

The first and foremost consideration the credit bureaus pay attention to is the individual’s credit history. Card issuers and lending companies are keen on receiving payments on time. Previous instances of delayed payments or worse, delinquencies, can mean substantial deduction. Together, these factors of credit history make up for 35 percent of the credit score.

Equally important are the outstanding debts and balances that a consumer has. Long-term loans usually do not pose a problem as long as the borrower avoids late or missed payments. Having a clean record with lending company means that a consumer can be trusted to pay his or her dues on time. Of course, recent loans can present a problem for borrowers who want to keep their scores high. Recently acquired loans can reverse all the points garnered by regular and punctual payments of previous loans. Unsettled debts and loans account for 30 percent of the credit score points.

The duration of credit payments and histories also accounts for 15 percent of the credit score. Cardholders can get the maximum points by simply having an extensive credit history. Of course, maintaining good credit ratings by paying on time also means more points for this particular category. Banks and creditors prefer clients that have had previous credit histories because this indicates that they are aware of how the credit industry functions.

Experts also advise against inquiring about loans too many times. If these inquiries yield inconclusive or intangible results, then lenders might consider them as rejections. These can ultimately lead to lower credit scores. This amounts to 10 percent of the total points.

Finally, consumers can get the maximum 10 percent allowed depending on the types of credit they have. Having too many cards can mean that a cardholder is more prone to late or missed payments.

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