Everything we have found on this subject indicates that having good or bad credit is determined by lenders and based solely on the credit score (read Credit Rating Insights). We found some people that never missed a payment and believed the credit was perfect but had low scores and; some people who assumed they had bad credit because they missed many payments in a row and were still late on their bills had high scores. Despite the consumer perception of good and bad credit, banks and other lenders determine good or bad credit using a credit scoring model.
The scoring model is supposed to estimate the risk of lending money or other consideration by reflecting individual's character with regard to obligations. In other words, how have they managed their debt and credit in the past. A FICO Score between 720 and 850 indicates "Good Credit".
There is no way to conclusively determine what causes the score to be low, or high. The scoring model used by The Fair Issac Corporation for instance is a trade secret. The scores are The Fair Issac Corporation's core product and despite some consumer backlash, there does not seem to be any reason to believe that the mathematical model will ever be divulged.
Our research was therefore based on samples of good and bad scores and the common denominators contained therein. From what we learned, an individual's credit rating is higher than normal if they have:
- a low Debt to Income Ratio (under 20%)
- debt other than credit cards
- no maxed out credit cards (charged to their limit)
- credit in use but less than 40% of the available balance is used
- no large credit card balances being carried month to month
- most of their debt Secured (Houses, Cars, Property, etc.)
- no late payments
- no missed payments
- long credit history
- lived in the same place two to five years or longer
- had the same job two to five years or longer
- not constantly applied for new credit
This not to say that other factors are not considered (number of credit card accounts, issuing banks, rate of interest) but we could find no evidence that these factors improved the credit score.
