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All About Credit Scores

To win the game, you have to know the score.

Understanding how credit scores are calculated is critical to good credit management. In this section, you will find a complete overview of exactly how credit scoring works and what consumers can do to better manage and help improve their credit scores.

How does credit scoring work?

What does credit scoring use to compute the score?

What information does a credit score ignore?

Things to remember when examining credit scores .

Payment history

Amounts owed

Length of credit history

How time affects credit scores

New inquiries

Types of credit used

Score reasons

How CreditXpert can help improve your credit score

Correcting errors in your credit file Quick credit file corrections


Let me remind you that credit is the lifeblood of business, the lifeblood of prices and jobs. – Herbert Hoover


How does credit scoring work?

Credit scores are determined by a mathematical model that evaluates the information contained in a consumer's credit report at a specific credit bureau at a specific time and compares it to the patterns in millions of past credit reports. The computation results in a single numerical score that represents the level of credit risk associated with that consumer. To calculate a credit score, a consumer's credit file must contain at least one account that has been open for a minimum of six months. In addition, the credit file must contain at least one account that has been updated within the last six months. These two criteria ensure that there is enough information (and, enough recent information) on which to base a credit score.


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What does credit scoring use to compute the score?

Five key types of information are used to calculate a consumer’s credit score:

  • Payment history: 35% of the score's weight
  • Amounts owed: 30% of the score's weight
  • Length of credit history: 15% of the score's weight
  • New credit inquiries: 10% of the score's weight
  • Type of credit used: 10% of the score's weight


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What information does a credit score ignore?

Credit scores review a wide range of information on the credit report. However, they do not consider the following:

  • A consumer's race, color, religion, national origin, gender, or marital status. US law forbids the consideration of these factors in the calculation of credit scores. In addition, the receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act may not be considered in the development of a credit score.
  • A consumer's age. Other types of point scores may consider age, however FICO scores ignore this information.
  • A consumer's salary, occupation, title, employer, employment history, or employment dates. Lenders may consider this information as can other point scoring systems.
  • Place of residence
  • The interest rate charged by the lender
  • Child/family support information or rental information
  • Certain types of inquiries
  • Any and all information that is not part of the credit report

  • Any and all information that has not been proven to be predictive of future credit performance


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Things to Remember when Examining Credit Scores

  • Each credit score is based on a review of all five categories of information (payment history, amounts owed, length of credit history, new credit inquiries, and type of credit used) not just one or two.
  • No one piece of information alone can determine the score.
  • The weight of any item of information in a scoring category depends on the overall information included in the credit report.
  • A consumer's credit score is calculated using only information that is contained in the individual’s credit report.
  • The credit score considers both the positive and negative information in a credit report. So, for example, though late payments will lower the score, establishing a good track record of on-time payments will raise the score.

For some consumers, one particular factor may carry more weight than it does for someone else with a different credit history. For example, late payments by a consumer with a bankruptcy on their credit file may lower a credit score by a greater number of points than it would for a consumer with an otherwise positive repayment history. 

In addition, as the information in a credit report changes so does the importance of any factor in determining the score. Therefore, it is impossible to say exactly how important any single factor is in determining a score. The benchmarks for relative importance of different types of credit information are based on trends within the general population and will therefore vary by situation. What is important is the mix of information, which will vary from person to person, and for any one person over time.

Remember, lenders look at many things when considering a credit decision including income, term of employment, and the kind of credit being applied for, just to name a few.


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We'd like to know a little bit about you for our files, we’d like to help you learn about yourself… - Simon & Garfunkel


Payment History

Payment history typically accounts for approximately 35% of a credit score. It is one of the most important factors in a credit score. 

However, a few late payments will not necessarily kill a credit score. An overall good credit picture over several years can compensate for one or even two instances of late credit card payments. Conversely, a complete absence of late payments does not guarantee a "perfect score". 

Approximately 65% of all credit reports show no delinquency at all so you must remember that payment history is just one area looked at when developing the credit score.

The following factors are considered for payment history:

  • Payment information on different types of accounts.
    These accounts include credit cards (Visa, Master Card, and American Express), retail accounts (credit cards from retail stores), installment loans, and mortgage loans.
  • Public Record and collection accounts such as bankruptcy, suits, tax liens, judgments, and foreclosures
    These items are considered to be very serious credit infractions, although items which are older and items with smaller outstanding balances will have less of a negative impact on a credit score than more recent items or items with larger balances. 

Also, even after a collection account, judgment, or tax lien is reported as paid, the account is still regarded as seriously delinquent because it went to a collection status. It is always responsible to payoff all collection accounts, but it is advisable to do so only after the close of escrow when buying a home. Doing so prior to the close of your home can cause your credit score to go down.

  • The details of late payments, public record, and collection accounts.
    How late an account payment was, how much the amount owed was, how recently it occurred, and how many accounts are involved will all impact a credit score. 

A 60-day late payment is not as bad as a 90-day late payment. But, how recently the late payment occurred and how often it has reoccurred are both important factors. For instance, a 60-day late payment that just occurred last month will have a greater negative affect on a credit score than a 90-day late payment that occurred 4 years ago. 

Closing an account on which a consumer was delinquent does not remove the negative item from the credit report. Keep in mind, however, that a 30-day delinquency is not considered a serious delinquency. A 60-day or greater delinquency is considered serious. Although a 30-day delinquency will affect the credit score negatively, it will not be as great an effect as a 60-day or greater late payment.

  • How many accounts show no history of late payments?
    A good record on most credit accounts showing no delinquency will increase the credit score.

Payment History Advice

It is best to manage credit proactively and responsibly over time:

  • Pay your bills on time.
    Late payments and collection accounts can have a major negative impact on your credit score. Late payments that have occurred recently are more serious than late payments that occurred several years ago.
  • If you have missed payments, bring your account current and keep it current.
    The longer you pay your bills on time, the better your score will be.
  • Paying off a collection account will not remove it from your credit report.
    It will be remain on your credit report for 7 years.
  • If a consumer is having trouble meeting their credit obligations, they should contact their creditors or see a legitimate consumer counseling service.
    This will not improve the score right away, but if you can begin to manage your credit and pay on time, your score will improve over time. The FICO score does not penalize the score of a consumer for entering Consumer Credit Counseling.
  • Check your credit report on a regular basis, at least annually, for errors.
    • You should check your report for errors in late payment reporting and – if you find errors – contact the reporting bureau to have them corrected. 
    • Check for outdated, especially derogatory, information that is old enough to be purged from the report. 
    • Make sure that accounts, again especially derogatory accounts, are reported with the correct date of last activity. This also includes accounts that have been discharged through bankruptcy. The last activity date on bankruptcy accounts should match the date that the bankruptcy was discharged.

To learn more about how to correct inaccuracies on your credit report, visit our Credit Disputes page.


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You can observe a lot by watching. - Yogi Berra


Amounts Owed

The current amount owed on your accounts typically accounts for approximately 30% of a credit score.

Owing money on the credit accounts you have does not mean that your credit score will be lower or that you are a high-risk borrower. However, owing a large amount of money on many different accounts can indicate that a consumer is overextended on their credit and is more likely to make late payments or default on their obligation to repay the loans. Credit scoring tries to determine how much is too much for a particular individual.

The following factors are considered regarding amounts owed:

  • The amount owed on all accounts
    Even if you pay off your credit cards in full each month, your credit report may show a balance owed on your accounts. This is because creditors report their accounts one month in arrears, so a payment made on May 1st would not be reflected on the credit report until June 1st.
  • The amount owed on different types of accounts
    In addition to the total amount owed, the score considers the amount owed on specific types of accounts such as credit cards and installment accounts.
  • Whether a balance exists on certain types of accounts
    In some cases, having a minor balance without missing a payment shows that the consumer has managed credit wisely. This scenario can reflect slightly better on the credit score than no balance at all. On the other hand, closing unused credit accounts that show zero balances and that have been paid on time will not usually raise your score. In fact this practice could actually lower your score.
  • How many accounts have balances
    A large number can indicate a high risk of overextension.
  • The amount of the total credit lines available that is being used on credit cards and other revolving credit accounts
    Based on the evaluation of literally millions of credit reports, a consumer who is close to using 100% of their credit card limits has a higher chance of becoming delinquent in their payments at a future date. Sometimes an individual wonders why their credit score seems low when they pay their minimum payments on time month after month. This is most likely because the balance owed is over 50% and this triggers the negative "high proportion of balances to credit limits" scoring factor.

Amounts Owed Advice

  • Keep balances low on credit cards and other revolving accounts.
    High loan balances can negatively affect a credit score. Maintain balances below 50% of the available credit limit.
  • Pay off debt as soon as possible.
    The best way to improve your credit score in this area is by paying down your revolving credit accounts. In fact, owing the same amount but consolidating the amount owed into fewer accounts may lower your score.
  • Consolidate higher interest debt into a new lower interest account. (Sometimes)
    Financial planners often recommend debt consolidation. While this makes sense in lowering the amount of interest paid, this strategy can backfire on you when it comes to your credit score.

Opening a new account with a high balance relative to the credit limit and closing existing accounts usually lower credit scores for many months until the balance drops below 50% of the credit limit and until the account has been open for a year.

Bottom line: If you are in the market for a home now or are thinking about purchasing a home in the next 12 months, you should try to avoid this common mistake.

  • Do not close inactive credit cards as a strategy to raise your credit score.​​
  • Do not open new accounts that you do not need, just to increase your available credit.
    This practice could cause your score to drop lower depending on the length of time you have had established credit.


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Length of Credit History

Length of credit history typically accounts for approximately 15% of a credit score.

Generally, the longer the credit history the higher the score. But, even individuals who have not been using credit for very long can have high scores, depending on many other factors in their credit report.

The following factors are considered for length of credit history:

  • How long credit accounts have been established
    The credit score looks at both the age of the oldest account and an average age of all the accounts on the credit report.
  • How long certain credit accounts have been established
  • How long it has been since the consumer has used certain types of accounts

Length of Credit History Advice

  • If you have only been using credit for a short while, you should avoid opening many new accounts quickly over a short period of time. New accounts will lower the average account age, which will have a bigger effect on the score if the consumer does not have a lot of other account information on their credit file. Also, rapid account acquisition may look riskier if the consumer is a new credit user.
  • Remember that most new accounts do not begin to affect the score in a positive way until they are 12 to 13 months old.


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How time affects credit scores

Credit scoring systems look at each account on your credit file and review them through a proprietary algorithm that uses this information alone and in relation to other information on your credit file to determine the likelihood for repayment or delinquency.

Information that factors into the development of your credit score includes current or late payments, how late the payments are, number of open accounts you have, how much credit is being used by you in relation to how much credit you have available, and whether there are serious delinquencies on your file like bankruptcy, liens, and charge-off accounts.

Fair Isaac scoring models place a great deal of weight on how recently you had a credit problem. In a proportional sense:

  • A major delinquency in the past year has a 93% negative impact
  • A major delinquency between 1-2 years-old has about a 60% negative impact
  • A major delinquency between 2-3 years-old has a 44% negative impact
  • A 3-4 year old delinquency has a 33% negative impact
  • Any delinquency older than 4 years has only a 22% negative impact

Your credit score is like a picture taken by a camera that is developed at the time of inquiry by a credit grantor pulling your credit file. Your credit score can change with the passage of time as well as with the addition of new information to your credit file. As delinquency information in your file ages its negative affect on your credit score lessens.


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For every complex problem, there is a solution that is simple, neat and wrong. - H.L. Mencken


New Inquiries

New credit inquiries typically account for approximately 10% of a credit score.

Research has shown that opening several accounts over a short period of time typically represents a greater risk of default, especially for people without an established credit history.

New requests for credit (such as are generated when a lender requests a copy of an applicant's credit report) can affect a credit score in a similar way. However, credit scores do an excellent job of telling the difference between rate shopping (which is usually not associated with higher risk) and searching for many new credit accounts.

The following factors are considered for new inquiries:

  • How many new accounts a person has - 
    The score looks at how many new accounts there are by type of account.  For example, the score looks at the number of new, open credit card accounts.
  • The time since a consumer has opened a new account – 
    The score looks at the time opened by individual account, and also by type of account.
  • The number of recent requests for credit made by the consumer

Inquiries remain on a credit report for two years but credit scores only use the inquiries listed on the credit report from the most recent 12-month period.

When a consumer directly requests a personal credit report (in order to review for accuracy), that request does not affect the computation of the score. The score computation also does not include any inquiries a lender makes in order to make the consumer a "pre-approved" credit offer.

There have been recent changes in how FICO models count inquiries for scoring purposes. It is a very complicated algorithm but the basic premise is that all auto- and mortgage-related inquiries made within a 14-day period are counted only as one inquiry for scoring purposes. The score computation also ignores all inquiries within the last 30 days of scoring. To help minimize any possible negative impact when shopping for mortgage rates, try to make all your inquiries within a 2-week period.

  • How long since inquiries were made by lenders
  • Whether the consumer has a good recent credit history, following past payment problems

Re-establishing credit and making payments as agreed after a period of late payments will help to raise your score over time.

New Credit Inquiries Advice

  • Make sure your rate shopping is done within a 2-week period.
  • Re-establish your credit history if you have had previous payment problems.
    Opening new accounts responsibly and making payments on these accounts as agreed will raise your score over time.
  • Remember that your score will not be affected by requesting your own credit report for your review.
    This will not affect your score as long as you order your report directly through one of the major credit bureaus or through a company authorized to provide credit reports to consumers.


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All right, everyone, line up alphabetically, according to your height. - Casey Stengel


Types of Credit Used

The types of credit used typically accounts for approximately 10% of a credit score.

The credit score computation considers the mix of credit cards, retail accounts, installment loans, mortgage loans, and finance company accounts. Though the credit mix is usually not a key factor in determining the score, it can become more important if there is not a large amount of credit information on which to base the score.

The following factors are considered for types of credit used:

  • The types of credit accounts a consumer has
    (and, how many of each appear on the credit report)
  • The total number of accounts a consumer has
    (how the number of accounts effects a particular credit report and score will vary by individual)

Types of Credit Used Advice

  • Apply for new credit accounts only when you need them.
    Opening new credit accounts to alter the “credit mix” will not typically raise your score.
  • Use credit cards, but manage them wisely.
    In general, using credit cards and installment loans will have a positive impact on your score as long as you make payments according to the account terms. An individual with no credit card usage tends to be a higher risk than someone who has used credit cards responsibly.
  • Remember that closing an account does not make it go away.
    A closed account will still appear on the credit report and may be considered in the score calculation. And, if you close an account that has had a poor payment history, it will become a more recent account because you will have changed the date of last activity to the present. This will make the closed account relevant in the calculation of your credit score and will likely have a negative effect.


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FICO Score Reasons

Here are the ten most common credit mismanagement mistakes that can result in a lower credit score:

  • Serious delinquency
  • Serious delinquency and public record or collections filed
  • Derogatory public record or collection filed
  • Time since delinquency is too recent or unknown
  • Level of delinquency on accounts
  • Number of delinquency on accounts
  • Amount owed on accounts
  • Proportion of balances to credit limits on revolving accounts too high
  • Length of time accounts established
  • Too many accounts with balances


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How CreditXpert can Help Improve your Credit Score

CreditXpert  is a “score improvement report” that is prepared using the information in your credit file. Available through a Birchwood mortgage broker, CreditXpert analyzes the individual accounts in your credit file in order to identify opportunities to improve your credit score.

Based on this analysis, CreditXpert recommends specific actions you can take to raise your score and also estimates the increase you can expect for each of the recommended actions. As an example, it can tell you that moving a portion of one account balance to another account is likely to result in a score improvement of “x” number of points. Some of the recommended actions will have an immediate effect while others may help you improve your score over time.


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Correcting errors in your credit file

In order to affect your credit score, all corrections to your credit report must be made directly via the major credit bureaus (Equifax, Experian, and TransUnion).

For all the information on how to file a credit dispute, visit Credit Report Disputes.


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If winning isn't everything, why do they keep score? - Vince Lombardi


Quick credit file corrections

Birchwood offers a service (available through our mortgage brokers) that allows consumers to expedite corrections to credit reports. The turn around time to address inaccuracies is usually approximately 3 to 8 business days (rather than the standard 30 to 45 days).

This service is available only to consumers who are in the process of applying for a home loan, and only through a Birchwood mortgage broker.

As with all credit report corrections, this expedited service makes adjustments directly with the three major credit bureaus. The process requires specific documentation as well as Birchwood’s validation of the error with the lender.

Required documentation includes a description of the error and written proof of the correction to be made. For example, copies of bankruptcy papers, lien releases, and letters from the lender on the lender's letterhead stating the correction to be made and signed by the lender, etc.

It is important to note that on collection or bankruptcy account corrections, the last date of activity shows the date that the collection was paid off or the bankruptcy was discharged with zero balances.

Birchwood will verify all written information provided and will transmit the verified information to the credit bureau that reported the error so they can verify, as well. The credit bureau then changes the data on their file, installs a block against future data update changes, and confirms that the change has been completed. The Birchwood mortgage broker is notified that the change has been completed so he or she can run a new credit report to compute a new score. There is no guarantee that the changes will result in a score increase.

For information on Birchwood mortgage brokers or lenders in your area please contact us or call 800-910-0015.


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