Survey: What Factors Determine Your Credit Score?

Visa recently completed a survey to find out what consumers know about credit scores in general, and the factors used to produce those scores. As it turns out, many consumers don’t understand which credit score factors count the most toward their overall score — and which factors aren’t used at all.

The company surveyed more than 1,000 consumers, by way of phone interview. They asked a series of questions pertaining to credit scoring. The survey revealed some common misconceptions about credit score factors.

Credit Scoring Misconceptions

Your credit score reflects how you have borrowed and repaid your debts in the past. A pattern of responsible borrowing will result in a higher score. A pattern of missed payments, debt collections and other forms of financial negligence will result in a lower score.

There are different types of credit scores. For consumer financing (such as mortgages and auto loans), the FICO and Vantage scores are the ones most commonly used by lenders. These scores affect your ability to qualify for loans, and they also influence the interest rate you receive from the lender.

If you want to improve your score, you need to understand the primary credit-score factors used to produce it. And this is where the myths and misconceptions come into the picture. According to Visa’s survey, many consumers don’t understand the factors used to determine their credit scores. For example:

  • Nearly 60% of the people surveyed believed that their employment history is used to determine their credit scores. This is false. While your employment history might be considered by a mortgage lender, it is not used as a credit scoring factor.
  • Approximately 53% of consumers thought the interest rates assigned to their current debts partly determined their credit scores. This is another misconception. Your score will certainly influence the rate you receive on a new loan. But the reverse is not true — your current interest rates are not used as credit-scoring factors.
  • There was also widespread confusion about the use of assets. In the survey, 53.1% of consumers believed that their assets / savings were used to determine their credit scores. This is also false. Lenders may consider this factor when considering you for a loan (especially mortgage lenders). But it’s not used to determine your score.
  • Other misconceptions included age and place of residence: 38.6% thought age was a credit score factor, and 25.3% thought that scoring was partly determined by where they lived. In reality, neither of these factors is used to determine a person’s credit score.

Consumers actually have a lot of control over their credit scores. These three-digit numbers are not assigned arbitrarily. Nor do they incorporate demographic factors such as age or location. They are derived from the consumer’s financial activity. They are a direct reflection of how a person has borrowed and repaid money in the past.

So Which Factors Are Used to Determine Your Score?

We’ve talked about the things that are not part of the credit-scoring mix. Your employment history. Your age and location. The interest rates you hold on your current loans. None of these factors are used to determine your credit score. So where does your score come from? In a nutshell, it comes from your history of credit usage.

The amount of credit you are currently using. The number of accounts you have open. The number of times you’ve neglected your debts in the past. These are the primary factors used to determine your score. For example, here are the five categories of information used to create a FICO score.

FICO Score Chart
Chart: The 5 factors that determine your FICO credit score

Here’s a breakdown of the five items listed above:

  1. As you can see from the chart above, your payment history counts more than any other factor. This category shows how you have repaid your debts in the past. It includes all of the accounts that show up on your credit report (auto loans, personal loans, credit cards, retail accounts, etc.).
  2. The amounts owed on your various accounts is another major factor that determines your score. Primarily, we are talking about credit cards and installment loans. If you are only using a small portion of your available credit, it should have a positive effect on your score. On the other hand, if you have “maxed out” one or more of your accounts, it will harm your credit score.
  3. The length of history refers to the amount of time you’ve been using credit. It probably dates back to the first time you opened an account or took out a loan. Unlike the first two items above, there isn’t much you can do to optimize this category.
  4. New accounts is another key factor used to determine your credit score. This refers to the number of recently opened accounts, recent inquiries or “credit checks,” and other factors. If you obtain multiple quotes from lenders (i.e., rate shopping), you should do it within in a narrow time-frame.* The scoring models are designed to recognize this, and they shouldn’t penalize you for it. But if you have a lot of credit inquires from loan applications over an extended period, it may lower your score.
  5. Types of credit is a lesser category that doesn’t weigh as much. This refers to the different types of accounts you have open at any given time (mortgage, retail accounts, installment loans, etc.).

* Source: MyFICO.com (the company that developed the FICO credit-scoring model)

It’s important for consumers to understand that factors used to determine a credit score. In this context, knowledge is truly power. You can’t improve your score until you know what makes it “tick.” And that includes understanding the five factors listed above.