How is your credit score calculated?

If you’re like most of us, you may temporarily blackout anytime someone mentions the words “credit score”. It’s a number that means so much, yet many of us barely pay it any attention. In fact, according to TransUnion, a popular credit reporting agency, nearly 70% of Americans say they have little to no understanding of credit scoring.

Unfortunately, you can’t ignore your credit score for long. If you’re carrying a low score, for example, you’ll likely pay more interest on loans, could see your insurance premiums increase and be unable to buy a home or car, land a job or rent an apartment.

Here’s a simple breakdown to help you see exactly what affects your score and where to focus your efforts to keep your score nice and high.

Credit Report Breakdown

35% Payment History

This is the FIRST thing that any lender wants to know; if you have had payments in the past and how you handled paying them. Missing a payment or making only minimum payments will have an effect on how this score is created.

30% Amounts Owed

This is calculated by all the amounts owed such as credit cards and other installment loans, i.e. car loan. Having a very small balance without missing a payment shows that you have good credit responsibility that can create a better score than having no balance at all.  Closing unused credit cards without a balance and or with good credit standing will not raise your credit score. However someone who is “maxing out” cards and using a lot of credit shows that they may have trouble making payments in the future and it will be reflected in this part of the credit score.

15% Length of Credit History

This area is taking a look into how long your credit accounts have been established (the age of your oldest account) and how long it has been since you used the credit accounts. Generally, a longer use of credit or someone who is new to credit will have a higher credit score, depending on how the rest of the report looks.

10% Types of Credit Used

This will take a look at the variety of credit (retail and credit cards, installment loans, finance accounts and mortgage loans). It will review what experience you have with these various types of loans and the total number of accounts that you have. This is checking to see your overall use with credit and looking to see if you have too many accounts for your specific “credit picture.”

10% New Credit

Someone who may open several accounts in a short period of time may show to be a higher risk individual especially if that person is new to using credit. It is recommended that you should wait at least 6 months in between opening a new credit account.

Now that you understand how credit is calculated, whenever you review your credit score you will have a better idea why a certain number is reflected or what steps you can take to raise the number. Setting up a long and healthy credit history is a great way to pave a positive future with lenders.

Source:
“What’s in My FICO Score.” FICO Credit Score Chart: How Credit Scores Are Calculated. MyFICO, n.d. Web. 26 Mar. 2014.

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