What goes into the calculation of credit scores?

January 1st, 2013 | Author:

[H]ow 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

Tips to Help You Improve Your Finances in 2017

January 20th, 2017 | Author:

[I]f you are like many people, you made a New Year’s resolution to improve your finances or rebuild your credit for 2017. While this seems like a worthy goal, it won’t gain much steam unless you have a plan. You must determine exactly what you will do to achieve your goal and start working on […]

Continue Reading »

Steps to Take to Build Financial Security

January 18th, 2017 | Author:

[A]re you trying to rebuild your credit? Are you tired of living from paycheck to paycheck? If you have set a goal to become more financially stable in the new year, you need to have a plan. Here is one that almost everyone can follow to achieve success. 1. Set Long-term and Short-Term Goals Before […]

Continue Reading »

Mistakes People Make with Credit Cards

January 16th, 2017 | Author:

[G]etting a credit card can be a sign of “growing up” for many. It feels good to know you have earned your way to having credit or to have rebuilt your credit to the point where you can be trusted with credit again. However, not everyone handles this new responsibility in the best way. Here […]

Continue Reading »

How to Protect Your Credit If You’re Self-Employed

January 13th, 2017 | Author:

[B]eing self-employed often brings a sense of independence and freedom. You have a flexible schedule, and you are in control of how much you earn and when you work. However, it also comes with a few negatives, especially when it comes to your credit history and credit rating. Here are some ways to protect your […]

Continue Reading »

How to Take Control of Your Finances

January 2nd, 2017 | Author:

[I]f your goal is to be financially independent and able to enjoy life, you must take control of your money. Here are a few tips to help you in this process so you can live the kind of life you want. Understand Your Income This is the fun part. Figure out how much income you […]

Continue Reading »

Don’t Let the Monsters Steal Your Identity This Halloween

December 12th, 2016 | Author:

[I]t can seem as if the ghouls and goblins of the finance world come out in full force around the holiday season. Hackers and identity thieves know more people shop from Halloween to the New Year, which leaves them more vulnerable. Here are a few tips on how you can protect your identity now and […]

Continue Reading »

Don’t Let the Colder Weather Ruin Your Credit

December 9th, 2016 | Author:

[A]s the temperatures drop, heating costs rise. If you live from paycheck to paycheck, even a slight increase may leave you wondering how you are going to manage all of your bills. The high utility bills can hurt your credit if you’re not careful. Too Many Bills, Not Enough Money If increasing utility costs mean […]

Continue Reading »