The Old Credit Scoring Model

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Some people never knew what factors were used to determine the credit scores on their credit report. They just knew they were low, so-so or high. I thought I’d list those factors as a sort of review because I believe the whole credit scoring process will be turned on its ear in the very near future given the realities of our financial lives.

I believe with all of the delinquencies, no-pays, foreclosures and other credit nasties, these factors will be re-evaluated and the weight assigned each will be either go up or go down or be eliminated entirely.

The 5 Factor Review

Number one at the top of the list is the factor you’d expect to be there. How do you pay. This comprises up to 35% of your credit score. Lenders like it when you and I pay on time. In fact, they prefer we pay ahead of time even though they only report it as paid as agreed when the payment is received by the due date. They never make an entry to the effect that John Q. Public always pays seven days, or thereabouts, early. I think they should.

This post isn’t meant to cover any consequences attached to any of the factors. If the consequences aren’t obvious, do some research and you’ll soon know more than you may care to know about credit consequences.

Number two is another obvious factor and, to me, in its proper order. How much do you owe. At this point in time, this factor comprises 30% of your credit score. Coincidentally, this same 30% number is the high end of what lenders like to see for your combined trade line balances. For example, let’s say you have a combined trade line balance of $10,000 and outstanding debt (not counting mortgage) of $2,000. Your outstanding amount owed is 20% (2000 divided by 10000).

On the other hand if you have an outstanding balance of $4,000, your percent owed is 40%. Lenders don’t like you as much as they like the 20% borrower. The obvious advice for this factor is don’t let your amount owed to total credit in force surpass 30%.

Number three factor is the length of time you have been borrowing. This comprises 15% of your credit score. Here is where the newly minted college grad or worker bee naturally falls short. Their number of years with credit is a heck of a lot fewer than a middle aged person or an old geezer like me.

Assuming the young person hasn’t maxed out their first credit card or in some other way destroyed their credit, they can turn it into a positive by keeping it open. Again, this isn’t a post about fine tricks to raise your credit score but I couldn’t resist tossing in a piece of advice.

Number four at 10% of your credit score is your rate of credit expansion. That is a fancy way of saying you could be applying for too much credit too fast if you don’t have the ability to make timely monthly payments.

The positive for opening new accounts over time is that it will definitely raise your credit score in the long term assuming you pay your bills on time.

Number five is a factor not many people would ever guess. Lenders want to know how diverse are your trade lines. This comes in at 10% of your credit score. As you might expect, credit diversity is having more than one kind of trade line. Most people have credit cards. That’s good because that is one type of trade line. Sprinkle in auto loan(s), mortgage, retail credit, etc and you have a diverse credit history.

Five Factor Opinion

Those are brief overviews of the 5 factors comprising your credit score. My guess is one or more of those factors will be scaled down or eliminated from a future scoring algorithm.


Because the number of people who have had their credit destroyed through foreclosures, job loss, savings melt down and other not nice economic happenings is now rising astronomically. Astronomically is bigger than exponentially in the credit market.

I don’t know which ones will be eliminated or scaled back but if past history is any guide, foreclosures, for example, will be like today’s medical bill(s) notation(s). They will be acknowledged but won’t be much of a negative. Credit cards probably will receive the same type of treatment in my opinion.

I could pontificate on the rights, wrongs, injustices of today’s scoring model as well as on the type of model that awaits us but it would be only so much expended air. Given nobody knows what will really happen, I’ll simply keep my musings to myself. I’ll simply let my post stand as food for thought and sit back and see what will be coming our way.

I’d love to hear your ideas/opinions on the subject. The more this gets bantered about maybe, just maybe, we can influence how are credit scores are computed.

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  1. LoanSurvivor on

    It will be extremely interesting to see how the effects of the “Great Recession” will cause credit to be treated.

    I’d like to think that you’re right and foreclosures will be somewhat ignored. But, banks & the government they control, may want to keep us under their thumb of control.

  2. Tom,

    Your prediction here is probably going to be very close to what will actually happen down the road. Scores of people with stellar FICOs some years ago are now going through foreclosures and credit card misery thanks to the economic meltdown. They know how to handle money, they are responsible, but this disaster just overwhelmed them. In a few years they’ll back on their feet and become once again a productive segment to our recovering economy.

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