Five Factors That Make Your Credit Score

Nov. 29, 2010— -- I check my email regularly and try to provide answers here in my column when somebody poses a particularly good question. Here's one that I know confounds a lot of people: credit scores and why your own isn't higher.

QUESTION: A credit reporting firm is currently reporting my credit score as "790," but they are unable to cite any factors as to why it is not higher. My combined cash credit limits --including all of my bank card accounts-- is nearly $300,000. My combined monthly bank card bills average $6,000 resulting in a very high credit to debt ration of 50:1. I always pay all balances in full on or before due dates --never having a revolving balance. During my entire lifetime, I have NEVER been late on a payment or reneged on an obligation. Therefore, I believe my credit score should be much higher, much closer to the 850 maximum. Is their credit score formulation flawed? How could this otherwise be explained? It is further interesting to me how a credit reporting agency can issue an arbitrary score without knowing an individual's net worth or their ratio of assets to liabilities, and cash flow. These are the real constituents of one's credit worthiness.

~Tom D., Pennsylvania

A: In this tricky economy, lots of people would love to have your problem, Tom. A 790 credit score is outstanding! I will tell you that it is better than my own credit score of 785! But I'm not complaining, because here is the simple truth: as long as you have a credit score of 720 or better, you can get any kind of loan you want and get it for the lowest possible interest rate. It's true that720 is a higher threshold than in the real estate bubble days. After the mortgage meltdown of 2008, the threshold for what is considered "excellent" moved up. It used to be that anybody with a score of 680 or above could land a great loan. In fall of 2008, when credit tightened up, lenders started telling me that now only people with scores of 720 – occasionally 740 —and above could qualify for the best loans.So Tom and folks with credit scores like his can relax. Just keep paying your bills on time and you will always have a solid credit score. But I do have some theories as to why somebody like Tom doesn't score over 800. There are five factors that go into your credit score. Tom has the "Payment history" and "Amounts owed" categories covered because he always pays on time and doesn't rack up too much debt in relation to the amount of credit he has been approved for. But it's possible he could be getting dinged in the other three categories, which are mysterious ones only a statistician would think of. Length of credit history. The inventors of the credit score discovered a correlation between people who have been banking for a long time and people who bank responsibly. It shows stability. The FICO model weighs how long you've had your oldest account and also the average age of all your accounts. This is a frustrating one because you can't exactly control your age and we don't want to start issuing credit cards to two-year-olds. Perhaps Tom canceled some of his older credit cards and opened up brand new accounts instead. That will temporarily lower your score.