How Credit Scoring Works
Three national credit bureaus collect information from creditors and provide reports to lenders. These reports include a summary of a borrower's loans, credit cards, lines of credit and revolving credit accounts, including detailed information on any late payments or other problems with the accounts.
Based on the information collected, each bureau, using an algorithm created by various vendors, also calculates a credit score for the borrower.
Factors that can impact a credit score:
Poor Payment History — Paying bills late, having bills sent to collection agencies, having foreclosures on home loans, having cars or other purchases repossessed or declaring bankruptcy.
Approaching Your Credit Limit — keeping high balances on a number of credit accounts, especially when the debt is close to the credit limit.
Short Credit History — having credit accounts for a short time or never having had a credit account or loan.
Too Many Credit Applications — having too many recent applications for new accounts or loan.
Too Few Credit Accounts — it’s better to have a few revolving credit accounts with low balances than 1 or 2 with balances that are close to your credit limit.
Too Many Credit Accounts — Having too many credit cards or loans. Generally, experts recommend having no more than 3 or 4 credit cards.
Credit Problems Don't Disappear Overnight
Past credit problems, such as late payments, can stay on your credit report for up to 7 years from the date the original payment should have been made. Bankruptcies can be reported for up to 10 years.
Lenders do tend to give more weight to the most recent payment information. And no matter what your credit is like now, you can take steps to improve your credit for the future. See How to Improve Your Credit.