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

Ways to Improve Your Finances and Your Credit Score

July 31st, 2015 | Author:
h

ometimes it can be difficult to manage your financial responsibilities. You feel overwhelmed and end up trying to forget about the bills you have to pay and the accounts you should reconcile. To simplify your finances and protect your credit score, you should consider doing one or all of the following. Reduce the Number of […]

Continue Reading »

Why You Should Love Credit Cards

July 30th, 2015 | Author:
h

lenty of people have credit cards. They often use them to make purchases or even to pay bills in between paychecks. However, many people do not really appreciate their credit cards and what they can do. Earn Rewards One of the best reasons to have and use a credit card is because of the rewards […]

Continue Reading »

Why You Shouldn’t Overlook Your Debt

July 27th, 2015 | Author:
h

f you have been in a debt a long time or have a long-term loan, it can be easy to pretend it doesn’t exist. Even if you make the minimum monthly payments, you may assume you will always be in debt and not even try to become debt-free. Here are a few reasons why you […]

Continue Reading »

The Benefits of Signing Up for Credit Monitoring Services

July 24th, 2015 | Author:
h

rowse around on the internet and you will find several credit monitoring services. Some of them are free, like Credit Karma and Credit Sesame. Others, such as myFico.com require you to pay a monthly fee for their services. With so many options available, you may wonder if any of them are any good and how […]

Continue Reading »

Why Credit Scores are Good

July 22nd, 2015 | Author:
h

ou often hear only of complaints about credit scores, especially of those with low credit scores. It is often seen as a negative part of getting a loan or credit. Many people don’t understand credit scores and hear conflicting information about them. For many people, they have a bad view of scores and credit ratings. […]

Continue Reading »

How Credit Checks Affect Your Credit Score

July 20th, 2015 | Author:
h

lso called inquiries, when someone does a credit check, it can impact your credit score. While it isn’t usually a cause for concern since the change is slight, it can make a difference if you are just a few points away from qualifying for a loan. It may help to understand how inquiries work and […]

Continue Reading »

Learn about the Three Major Credit Bureaus

July 17th, 2015 | Author:
h

hile numerous companies have credit scoring systems, three bureaus provide information for the vast majority of creditors in the United States. They are: •Equifax •Experian •TransUnion Each one compiles its data and creates credit scores based on unique algorithms. While most people know about these three agencies, they may not be aware of all of […]

Continue Reading »