“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.
t’s a new year and you have new goals to get your credit in order. Maybe you want to buy a house or a new car or you just want to stop the collectors from calling you. No matter what your reason is for improving your credit, these apps can help make it easier. 1. […]
ow that the holidays are behind you, the focus may move to paying off your credit cards. They probably took a hit during the busy shopping season and may even be maxed out. If this is the case, you want to make paying them down quickly a top priority. Otherwise, you may find out that […]
ou check your credit score and are impressed to see that it has raised to 640 after a lot of hard work. You go apply for a loan or credit card and are turned down. In the rejection letter, it states that your credit score was only 583. Why the discrepancy? Can you trust any […]
ou know that credit scores are used to predict your likelihood of repaying a loan or paying off any credit obligations such as a credit card. Did you know that there are other types of scores that use nontraditional information to make certain determinations? These are secret scores that may be used by certain companies […]
ou’ve been approved for a new credit card. Now your credit score will surely get a boost. While this is most likely the case if you use your credit card responsibly, not all credit is good for your credit rating. Here is a look at some credit that can actually hurt you or at least […]
t the start of a new year, the focus is often on establishing good habits, goals and resolutions. Just as important is breaking bad habits that have put you in your current position. Sometimes, it is just as necessary to resolve not to do something as it is to create resolutions that say “I will”…fill […]
s you make all kinds of resolutions to improve your life, you don’t want to forget about your credit score. Now is the time to resolve that you will get your credit rating on track and improve your score. There are several reasons why. Buying a Home If you have been dreaming of buying a […]