Most U.S. residents have a credit score. This score, compiled by credit rating bureaus using a number of different sources of information, is a measurement of the relative likelihood that an individual will pay back a loan. Although each company's scoring model differs slightly, each uses a number of similar variables.
Length of Credit History
One of the main factors that companies look at is how long an individual's credit history goes back. Generally, those with longer credit histories generally received higher scores, as companies believe that people with a longer track record of paying back loans are more likely to continue to do so in the future compared with people whose credit history is short.
Outstanding Debt
The amount of outstanding debt that individuals currently have out is another variable that the reporting bureaus weight heavily. Those individuals who have more outstanding debt out are often given a lower score. This is because bureaus generally believe that the more debt a person has out, the more likely he is to default. Of course, certain types of debt are weighted differently: a $100,000 mortgage does not count against a person in the way that $100,000 worth of credit care debt would.
Payment History
According to the Fair Isaac Corporation, the inventors of the modern credit rating system, the foremost variable in credit rating models is payment history. Based on the principle that those who have paid their debts off in the past will continue to do so in the future, and those have defaulted before are more likely to do so again, credit bureaus use payment history as their primary factor in determining a rating.
Recent Credit
A less important but still significant variable in credit rating models is the person's recent credit history. The actions taken recently by the individual can affect his score in many ways. For example, if the individual has recently opened a number of new accounts, his score may drop slightly, as it appears he is getting ready to take on debt. However, if the person has recently reestablished a good credit history after problems in the past, this will boost his score.
Types of Credit
According to the Fair Isaac Corporation, the last variable used in credit rating models is the types of credit an individual has on their account. Credit can come in many different forms, including through credit cards, installment loans, mortgages and consumer finance accounts. Various reporting bureaus value these types of loans differently, with each specific formula affecting the individual's credit score in different ways.
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