What goes into the calculation of credit scores?

January 1st, 2013 | Author: test

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.

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