What goes into the calculation of credit scores?

January 1st, 2013 | Author:

How does my credit score get calculated?” It’s a question that has a surprisingly simple answer. Every credit bureau bases your credit score on five key variables. They are as follows.

The two largest factors of what goes into the calculation of credit scores are your payment history and how much you owe on your accounts.

  1. Making On-Time Payments (35%) – the single most important factor in maintaining a good credit score is making on-time payments. It doesn’t matter whether it’s a mortgage, car loan, student loan, or credit card, any open accounts that show a responsible history of payment will help your score.
  2. How Much Do You Owe (30%) – this tells a credit bureau how much available credit you have. If you have a credit card account, the credit bureau likes to see 70-90% of available credit, per open account. Not leaving yourself enough available credit could be a red flag for lenders.  Likewise, as your balance on installment loans (e.g. a car loan) goes down, your credit score may improve.

What else goes into the calculation of credit scores?

  1. Average Age of Open Accounts (15%) – remember that credit card account you opened in college that you still use today? It could be helping your credit score more than you think. A long history with a creditor is considered a positive because this part of your score is based on the average age of your open accounts.
  2. Types of Credit (10%) – having a mortgage, car loan, and credit card is better than having just one. This can be confusing for some consumers. Isn’t it preferable not to have a credit card? Maybe, but a credit bureau likes to see that you have a history of using credit cards responsibly. Is it necessary for you to have all kinds of credit? No. And as you can see it’s not weighted that heavily, but still something you should consider.
  3. Have You Recently Opened Accounts (10%) – this is the one area where new is not better. Opening new accounts can affect your credit score because it lowers the average age you’ve had open accounts. So be careful not to open too many accounts at once.

Remembering these five factors that go into calculating your credit score can help you make more responsible decisions. It’s not a mystery. In most cases, it’s common sense.

Newest Answers

Why You Should Know What Won’t Improve Your Credit Score

September 18th, 2014 | Author:

redit scores are confusing. It seems that everything you do in some way affects your credit score. However, while this may feel like the case, in reality not everything about you impacts your score. Even if it is reported on your credit account, it won’t change your score. Let’s take a look at some information […]

Continue Reading »

Tips to Help You Improve Your Credit Score with Credit Cards

September 17th, 2014 | Author:

ou often hear the advice to get a credit card if you want to raise your credit score. But often no one tells you how, especially if you have a bad credit score and are turned down by credit card companies. These same advisors may not tell you how to utilize your credit cards to […]

Continue Reading »

Is One Credit Card All You Need If You are a College Student?

September 16th, 2014 | Author:

ollege students can benefit from having a credit card before they graduate. It helps them establish a credit history that they will need to rent an apartment or buy a car. In addition, it will help them in the future when they want to buy a home if they have a long and positive history […]

Continue Reading »

How to Tell That You Need to Fix Your Budget Before Your Credit Score Drops

September 15th, 2014 | Author:

he main reason people have low credit scores is because they can’t pay their bills. While it may simply be a lack of credit history for some, most people have a separate issue with late payments and unpaid collections. Having a bad credit score doesn’t mean you are a bad person or even irresponsible. The […]

Continue Reading »

How to Improve Your Credit Score to Get a Home

September 12th, 2014 | Author:

f you are looking to buy a home and you have been turned down because of a low credit score, don’t give up hope. You can take action that will help you qualify for that mortgage. Some of these tips will help immediately while others may take a while. Pay Down Credit Cards Often just […]

Continue Reading »

A New FICO Score Could Make Life Better

September 11th, 2014 | Author:

he new FICO Score 9 was just released, and promises good things for the average person. While this updated model has been talked about for some time, it was finally made public in an announcement by FICO and will be available for lenders and creditors. Changes The main changes in this model are in regards […]

Continue Reading »

Consider Your Credit Score When Entering a Credit Card Payment Program

September 10th, 2014 | Author:

f your credit card debt has spiraled out of control and you are finding it difficult to make even the minimum monthly payments, you may be considering a hardship repayment plan. These plans often lower your payments either by reducing the interest rate or allowing you to pay only the interest. This is designed to […]

Continue Reading »