Cracking Your Credit Score Code


What do credit agencies look for in calculating your credit score – and how do they actually figure out your score? It’s an insider’s game, and the more you know how the insiders work, the better off you’ll be.

Here are the criteria credit agencies use, and how to leverage that information to your benefit.

First of all, gone are the days when companies use credit scores only to figure out whether you’re a good risk for a new car, credit car or home. Nowadays, the use of credit scores has become more widespread. For instance, many employers use credit reports to gauge a job applicant’s quality of character.

Similarly, a lousy credit history could get you rejected for a government security clearance. Even renting a home can trigger a credit review – landlords increasingly use credit reports as a barometer of a tenant’s financial health.

It stands to reason that with so much on the line, the more you know about your credit score, the better equipped you’ll be to take steps and raise your score to maximum levels.

The key to understanding credit scores is to figure out how they’re calculated.

By and large, credit rating companies like Experian (Stock Quote: EXPN), Equifax (Stock Quote: EFX) or TransUnion build their credit score calculus on four building blocks:

Payment history. Whether or not you make bill payments on time could be the most significant factor in calculating your credit score. Any delinquencies or collection agency notices will drive your score downward. Note also that the longer your missed payments (example 60- or 90-days late in paying your mortgage, as opposed to 30-days late) the lower your credit score.

Debt burden. Credit agency scoring models also rely heavily on the amount of debt you owe weighed against any maximum credit limits. For example, bumping up against the maximum limits on your credit card is considered a big negative by credit agency analysts. But if you keep your credit cad balance at less than 30% of your credit card limit, that’s considered an indicator of judicial credit use and will lower your credit score.

Credit history. It’s usually a good idea to keep your oldest credit accounts open, even if you’re not using them. Why? Because the longer your credit history, the bigger the boost to your credit score. Credit agency analysts take a dim view of consumers with a short credit history – it’s an invitation for a “rejected” stamp on your credit request.

Credit “tiers.” Not all credit is equal. Credit agency analysts give greater weight to big bank credit cards, and less weight to gas station credit cards or even a major retailer’s credit card. Mortgages and car loans are also weighted heavily when tabulating credit scores.

Historically, one company – Fair Isaacs (Stock Quote: FIC) – calculates the basic scoring model that the major credit rating agencies use to create your credit score. With credit scores ranging from 300-to-850, the fair Isaacs credit scoring model is a big trade secret.

What we do know is this: key criteria (like the barometers listed above) are given a numerical weight that’s used to actually create your credit score. It looks something like this:

  • Bill payment history: 35%
  • Money owed: 30%
  • Credit history: 15%
  • New credit: 10%
  • Types of credit used: 10%

While the major credit ratings companies use myriad factors to calculate your credit score, the bulk of your score depends on the above five criteria. But in the end, the difference between your credit score winding up in the low-600’s or high-700’s depends whether you pay your bills, how timely your payments are and how you balance your debt and your credit.

To get a better handle on your credit score, your first step is to find out what it is. According to, 45% of Americans don’t know their credit score and another 32% have never seen their credit report.

Now that you know the basic building blocks of your credit score calculus, use that information to evaluate your credit score, and thoroughly read your credit report.

These exercises alone can put you on the path to a higher credit score – and a potential windfall in savings from the better terms and interest rates that come from having a great credit score.

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