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

How to Enjoy the Holidays Without Going Deeper in Debt

December 19th, 2014 | Author:
h

ne of the biggest factors in your credit score is how much of your credit limit is being used. If you max out your credit cards during the holidays every year for gifts, you are hurting your credit score. Even if you spend the other 10 or 11 months paying it off, this problem becomes […]

Continue Reading »

Preparing for a Credit Check

December 18th, 2014 | Author:
h

ou want to buy a car or your first home. You already know that the lender is going to check your credit. How do you prepare for that situation before it happens? Get a Free Copy of Your Credit Report The first thing to do is to get a free copy of your credit report. […]

Continue Reading »

What Should You Do If You Don’t Have a Credit Score?

December 17th, 2014 | Author:
h

You hear so much about bad credit scores and how they can hurt you when you go to apply for a home loan or car loan. What about if you don’t have a credit score at all? You may have heard it said that no credit is worse than bad credit, but is it true? […]

Continue Reading »

Develop Good Credit Card Habits to Have a Good Credit Score

December 16th, 2014 | Author:
h

t’s a catch-22 for many people. You can’t get good credit without a credit card, but carry a high balance and it will hurt your credit. While this is a narrow view on how credit and credit cards function, it does provide a succinct statement on how credit and credit cards work together. The key […]

Continue Reading »

Are You Doomed to Have Bad Credit Forever?

December 15th, 2014 | Author:
h

iss one payment by 30 days and watch your credit score sink like a rock. Work hard to pay your bills on time from that time forward and it seems like your score creeps back up. If you have multiple negative accounts from the past on your record, it only compounds the problem. It may […]

Continue Reading »

Why Credit Card Debt is Good for the Economy and Bad For You

December 12th, 2014 | Author:
h

ccording to a new report from Equifax, credit card debt has increased in the second quarter of 2014 compared to the same time in 2013. This is good news for the economy because many credit experts say that increased levels of debt indicate improved consumer confidence. More Debt Than Savings Another survey conducted by Bankrate […]

Continue Reading »

When Accounts are Removed From a Credit Report

December 11th, 2014 | Author:
h

f you check your credit report occasionally and compare it to previous ones, you may notice that some accounts are no longer reported. Why does this happen and does it really matter to your credit score? There are various reasons that an account could fall off of a credit report. Sometimes it is a good […]

Continue Reading »