“[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.
- 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.
[I]f you made a resolution this year to pay off debt and improve your credit, you may find you have a challenge. For some, getting a second job is the best way to accomplish this goal because it provides extra income. If this isn’t an option, you can focus instead of saving money to give […]
[I]f you have bought a home recently, are in the process or plan to in the future, one of the options you may have is to purchase a home warranty. However, you will have to decide if having a warranty is worth the initial cost. What is a Home Warranty? A home warranty covers your […]
[F]or many, health insurance is a cost they can’t afford. Premiums have gone up and co-pays are often higher as well as deductibles. If you have decided that you just can’t have health insurance, be aware of what it may really cost you. Major Health Issues As long as you are healthy, not having health […]
[I]f you already work a second job or have kids and no option to take on part-time work, you may wonder how you will ever be able to pay off debt and improve your credit rating. Fortunately, there are ways you can earn money even when you don’t have time to fit in another job. […]
[T]he My Friend Cayla is a doll that has been making the news in a bad way. In fact, some advocate that parents get rid of the doll that has been banned in Germany. This interactive toy connects to the internet to talk with your child, answer questions and just be a lot more fun […]
[D]ebt is something most people have but very few want. Credit card debt and medical bills are especially detrimental to a person’s life and credit rating. For many, they take on a second job and devote the income to paying off debt. However, if this isn’t an option for you, there are still ways you […]
[M]ost people who spend too much know it. They run into the store for paper towels or a gallon of milk and come back with two or three bags of stuff. Every time they sit down to pay the bills and see they don’t have enough money to cover expenses, they promise never to splurge […]