Understanding Your Credit Score

When it comes to your credit report, the first thing (and sometimes the only thing) that people see is your credit score. Your credit score is a numerical value from 350 to 800 that is assigned to everyone based upon their credit history and some other factors which we’ll get into shortly. There are many things that you need to know about your credit score in order to monitor your credit effectively, and find out if there is negative information that shouldn’t be on your report.

Which Credit Score?

The first thing that you need to understand about your credit score is that there are three of them. That’s right – everyone doesn’t just have one, because there are three major agencies that 99.9% of lenders use to pull credit reports. A lender may pull a credit report from just one of these credit bureaus, or from all three, or any combination they choose. Your credit score will probably be about the same across all three agencies but some people have major differences between one bureaus report and another. Lenders will take an average of your scores of just the one from the bureau that they pull if they only pull one report.

Understanding Which Factors Affect Your Credit Score

Understanding the factors that affect your credit score is complicated because although the factors are basically the same, the amount of weight given to each factor differs based upon the credit bureau. They use complicated mathematical formulas to come up with your credit score, but in general, they are based on the following information.
Your Payment History: Your payment history is probably the biggest thing that affects your credit score. Anytime you make a late payment and it gets reported, it affects your credit score, and accounts that have been closed unpaid have a huge affect on your score.
Your Public Records: Your public records like bankruptcies, tax liens and foreclosures all have an effect on your credit score, but even more importantly, having a bankruptcy on your credit report will make lenders extremely wary about lending to you, because they will be afraid that you will declare bankruptcy again at some point. However, even if you have declared bankruptcy you can usually get a mortgage within 5-7 years, and after ten, it falls off your report completely.
How Long You Have Been Using Credit: This is an important factor that credit bureaus look at when calculating your score. Even though you may have had a perfect credit history for the last 12 months, the score will be higher for someone who has a ten year credit history with a few dings here and there. Creditors are wary about new credit, because they don’t know exactly what your credit habits are yet, and so will be wary about lending too much money, even if you have paid all of your payments on time so far. 
Brand New Accounts: Someone who has a lot of new accounts open will notice a reduction in their credit score and may be turned down for credit. Every time you open a new account, you extend your financial situation further and lenders don’t want to see you overextended. A dynamic called your debt-to-income ratio is used to determine whether or not you could be extended more income.
Inquiries: You can have a few inquiries on your credit report every year without it affecting your score, but then your score will go down with each inquiry. However, a few inquiries that are all obviously from the same type of loan – such as when you are shopping around for a good interest rate. But if you are just applying to everywhere you can trying to get credit, even if you keep getting turned down, it will affect your score.
Accounts in Use & Closed Accounts: The number of accounts that you have open and in use will also affect your credit report and so will the number of closed accounts that you have both positive and negative. As mentioned, your debt-to-income ratio is a factor, so the number of open accounts that you have along with the balance that is owed on those accounts is going to be a factor, not just the number of accounts that you have. Ideally, what you want is to have some open accounts with low balances and closed accounts that have been paid off.