Credit Report – How Your Credit Score Is Determined

With the many misconceptions about credit score, many people are usually surprised to discover that there’s more than one credit score. Credit scores vary for various reasons, including the company determining the score, the data used in the calculation, and the calculation methods. Credit scores are a strong determinant if you get an auto loan or not. They are provided by three top credit bureaus – Equifax, Experian, and TransUnion. The scores provided by these credit bureaus differ because not all lenders report information to the top three credit scores.

Your credit score is determined by a credit scoring model which examines your consumer credit reports. A score is then assigned to you with the range of 300 to 850 using intricate calculations. FICO is amongst the popular credit scoring models, although VantageScore is a close second. They look out for information that shows that a person is more or less likely to miss out on a payment. A high score indicates that you are more likely to pay off debt than most. Several factors determine your credit score and the type of credit score you will end up with. Below are some of the top factors that determine your credit score; let’s take a look.

Payment History

Your payment history is a huge determinant of your credit score. It is an important category that you shouldn’t take lightly. The scoring models take into consideration payments made on time and late payments. While on-time payments improve your credit scores, late payments can hurt your credit score significantly and affect your chances of getting that auto loan. Another payment history that scoring models take into consideration is public records like bankruptcy.

Credit Usage

This factor is just as essential and comes in right after payment history. How much you owe and how many of your accounts have balances determines your credit score. This spot is where credit utilization comes into play. Your current balance is compared with the credit limits on your credit card to determine your credit utilization ratio. Scoring models check out the credit utilization ratio of all your account. That is why it is best to keep the rate under 30%. Anything above 50% could hurt your credit score and hurt your chances of an auto loan.

Credit History Duration

When your credit file shows that you’ve been successfully managing your credit accounts for several years, it could improve your credit score. These models look at your oldest account, new accounts, and the average age of all your accounts. Although there’s no shortcut to building a lengthy credit history, closing a credit card account in good standing will help your credit score for up to 10 years.

Recent Activity on Credit

Although this isn’t as important as the others, some steps could affect your credit score. One of these is a hard inquiry carried out by a lender when you apply for an auto loan or other types of loan. A hard inquiry on your credit can reduce your credit score by just a few points, but it is noteworthy that credit scoring models know that shopping for loans doesn’t mean you’re risky. This scenario is apparent when you apply for preapproval for five different auto loans to determine the best rate. That doesn’t mean you’re taking more than one auto loan; they’re counted as a single inquiry.


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