“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.
- 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.
- 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?
- 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.
- 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.
- 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.
ave you got a bad landlord or homeowner’s association? You ask for repairs when something breaks or the building is poorly maintained. It is frustrating to deal with so when you move, you decide to “teach them a lesson.” You fail to pay last month’s rent or your association dues. Failing to pay even when […]
ou’ll see this claim a lot when you start researching how to improve your credit score fast. Companies make promises that you will see major results in no time. These claims sound fake to many people but for those desperate to qualify for a home or other major purchase, it may seem like a dream […]
he average FICO score went up back in April of 2014 to 692. While it falls in the range of average credit, it is on the high end. Prior to the recession, the average score was 690. Increased Responsibility Two major factors are being attributed for the jump. First, people are being more responsible with […]
ave you ever lamented over past mistakes that just won’t go away? You made poor decisions in the past or an unfortunate situation happened and you are paying for it years later. Legislation that is being proposed to Congress may change things for people with lower credit scores. In this legislation, changes would be made […]
ore employers are checking credit reports as part of the hiring process. While this is controversial for many people, it is becoming standard procedure in many jobs. The result is that you may not get hired if you have bad credit. What you might not know is that you can also get fired for having […]
ne of the most basic financial lessons to learn is the importance of saving money. You may be taught by parents or grandparents from an early age to save your money. You hear about it in money classes and even in credit counseling. Read numerous articles on saving money and you will find all kinds […]
he first time you look at your credit report, you may be surprised at the information that is listed. If you request reports from two or all three of the major credit reporting agencies, you may notice that the information looks different from one to another. How can the balance on a credit card be […]