Understanding your credit rating is critical to sound financial management. Your credit score is a direct reflection of how well you manage debt. It impacts interest rates, lending decisions, employment possibilities, and even whether or not you can obtain an insurance policy.

Five components used to calculate your FICO Score

FICO Scores are based on main five categories; payment history, amounts owed, length of credit history, types of credit in use, and new credit. The relative importance of each category may differ for consumers who have shorter credit histories but are generally weighted as follows:

Pie chart of factors that impact FICO credit scores

Payment History (35%)

Your payment history is the most important factor in calculating your credit score. Late payments, charge offs, foreclosures, repossessions, liens, wage attachments, and bankruptcies will all negatively impact your score at varying amounts depending on the severity of the issue. The score also considers how late a payment was, how much was owed, how recently the negative payment history occurred, and how many accounts are listed with a negative payment history. For example, a 60-day late payment two months ago will hurt your score more than a 90-day late payment from two years ago.

Amounts Owed (30%)

The amounts you owe is also a heavily-weighted factor in calculating your credit score. The score considers how much you owe on individual accounts and how much you owe in the aggregate compared to how much credit you have available. This factor is also known as the utilization ratio. As a rule of thumb, you should strive to keep the amounts you owe on credit cards and other revolving debt below 10% of the total amount available.

Length of Credit History (15%)

Typically, a longer credit history will increase your FICO Scores. However, even consumers who haven’t been using credit for very long may have high FICO Scores depending on their other credit score factors. Generally, your FICO Score considers the age of your oldest and newest accounts and the average age of all your accounts. Older is better. The score also considers how long it has been since you used certain accounts so it may lower your score to have unused accounts in your credit history.

Types of Credit in Use (10%)

Your mix of credit use is also considered in your score. A good mix would include credit cards, retail accounts, installment loans, finance accounts, and mortgage loans.

New Credit (10%)

The amount of newly opened credit accounts also figures into your score. Too many new accounts in too short a time period will generally lower your score. Especially if your history is relatively short.


Factors that are not used to calculate your FICO Score

FICO scores consider a broad range of information on your credit report but the following factors are not considered as part of your score:

  • Your race, color, religion, national origin, sex, or marital status
  • Your age (though other scoring methods do consider your age)
  • Your income, salary, occupation, title, employer, or employment history
  • Where you live
  • The interest rates being charged on your accounts
  • Child or family support obligations
  • Rental agreements
  • Whether or not you are participating in credit counseling
  • Soft inquiries such as consumer-initiated inquiries, promotional inquiries, and administrative inquiries
  • Employment and insurance inquiries
  • Any information not in your credit report

How long is bad credit report information reported?

How long is negative information reported?

Although the most typical reporting time period is seven years, different types of negative information can report for longer. Here are the reporting time periods in more detail:

Seven Years

  • Late payments
  • Charge-offs
  • Collections
  • Foreclosures
  • Judgments
  • Settlements
  • Repossessions
  • Delinquent child support obligations

Indefinitely

Technically, under the Fair Credit Reporting Act, if your report is being accessed for a loan or life insurance policy of $150,000 or more or for employment purposes for a job paying more than $75,000, the typical reporting periods do not apply. For those purposes the information can report forever. Fortunately, the credit bureaus generally adhere to the typical seven to ten year guidelines even for those purposes.

Bankruptcy

  • Chapter 7 bankruptcy can report for up to ten years from the date the bankruptcy was filed.
  • A Chapter 13 bankruptcy can report for up to seven years from the date of discharge or up to ten years from the date the bankruptcy was filed.

Defaulted Student Loans

Defaulted student loans can report for up to seven years from the date they are paid, the date they were first reported, or the date on which the loan re-defaults. These time periods are governed by the Higher Education Act. Under the FCRA there is no limitation as to the time periods student loans can report on your credit.

Tax Liens

Unpaid tax liens can remain in your reports indefinitely. Released tax liens must be deleted after seven years from the date released.


Credit inquiries can lower FICO Scores

Credit Inquiries

Credit inquiries occur when someone pulls your credit report. Inquiries are maintained in your credit reports for between six months up to two years depending on the type of the inquiry. Some types of credit inquiries will lower your credit scores and others will not.

Hard Inquiries

With a few exceptions noted below, hard inquiries that occurred in the last twelve months are calculated as part of your score. Any hard inquiries older than twelve months can remain on your reports for up to another year but are not calculated as part of your credit score.

Generally, hard inquiries are those that occur as a result of your attempts to obtain new credit. Hard inquiries can also occur as a result of skip-tracing efforts by collection agencies. Types of hard inquiries include:

  • Credit card applications
  • Auto loan applications
  • Mortgage applications
  • Personal loan applications
  • Student loan applications
  • Collection agency skip-tracing

Soft Inquiries

Soft inquiries are not calculated as part of your credit score. Types of soft inquiries include:

  • Consumer-initiated inquiries of their own reports
  • Inquries for promotional or “pre-approved” offers
  • Administrative inquiries from lenders with whom you have an existing relationship

30 Day Safe Harbor Period

Inquiries for mortgages, auto loans, and student loans are not calculated as part of your credit score if they are less than 30 days old.

45 Day Rate Shopping Allowance

Mortgages, auto loans, and student loans also benefit from a 45 day rate shopping allowance period in which multiple inquiries for the same loan type are calculated as part of your credit score but are only counted as one inquiry.

This allowance encourages rate shopping by consumers by not penalizing them for multiple related inquiries. Revolving credit applications do not benefit from this rate shopping allowance.

Employment, Insurance, and Utility Inquiries

Inquiries for employment purposes, insurance purposes, or to obtain utility services are not calculated as part of your credit score.


Credit Score Calculation: Minimum Requirements

To calculate your FICO credit score, your credit report must contain enough information on which to calculate the score. At least some of that information must be recently reported for a calculation to occur.

Minimum requirements needed to calculate your FICO credit score:

  • At least one undisputed credit account that is at least six months old
  • At least one undisputed credit account that has been reported or updated in your credit report within the past six months
  • No indication on the credit report that you are deceased

Simple steps to increase FICO credit scores

Increasing your FICO credit score

Most consumers can increase their credit score by taking these simple steps:

  • Pay installment loans, mortgages, and revolving credit on time
  • Keep credit card balances low—preferably below 10% of the available credit
  • Avoid applying for new credit
  • Keep older credit accounts open and current with low balances
  • Review reports periodically and repair any errors