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Home Financing Library

Credit Scoring and How It Works

Credit scoring is a statistical method that lenders use to quickly and objectively assess the credit risk of a loan applicant. The score is a number that rates the likelihood you will pay back a loan. Scores range from 350 (high risk) to 850 (low risk). There are a few types of credit scores; the most widely used are FICO scores, which were developed by Fair Isaac & Company, Inc. for each of the credit reporting agencies.

Credit scores only consider the information contained in your credit profile. They do not consider your income, savings, down payment amount, or demographic factors like gender, race, nationality, or marital status.

Factors that Affect Your Credit Score

Many different mathematical formulas are used to calculate credit scores and most are based on the following factors, although each scoring model may weight these factors differently:

Payment History

This, along with public records, generally accounts for approximately 35% of your score. A record of late payments on your current and past credit accounts will typically lower your score. Being consistent about paying on time can, over time, have a positive impact on your score.

Public Records

Matters of public record such as bankruptcies, judgments, and collection items may lower your score. Be aware of these, even if you can't always avoid them.

Length of Credit History

In general, a longer credit history is better and can sometimes have a positive impact on your score. Credit history typically accounts for around 15% of your score.

New Credit Accounts

Opening multiple new accounts in a short period of time may negatively impact your score.


An inquiry is recorded on your credit report whenever someone requests your credit report such as a lender, landlord or insurer. A large number of recent inquiries may negatively impact your score. Your new credit accounts and inquiries generally make up about 10% of your score.

Accounts in Use

The number of open accounts usually makes up approximately 10% of your score.

One of the most important factor for a good credit score is paying your bills on time. Even if the debt you owe is a small amount, it is important that you make payments on time. In addition, you may want to keep balances low on credit cards and other "revolving credit;" apply for and open new credit accounts only as needed; and pay off debt rather than moving it around. Every score is accompanied by a maximum of four reason codes. Reason codes should be reviewed by you to ensure they are accurate. Your credit report must contain at least one account which has been open for six months or greater, and at least one account that has been updated in the past six months for you to get a credit score. This ensures that there is enough information in your report to generate an accurate score.