How is your credit score calculated?

You already know it is important to have good credit if you want to reach your goals.

Some people like to know how things work and in this article I am going to explain to you how your credit score is calculated. Your credit score is determined by an assortment of mathematical algorithms which are used to determine your exact credit score. While the exact formulas are kept secret by Equafax, Experian and Transunion there is a rough estimate to how your credit score it calculated.

35% of your credit score is made up from your payment history.
The largest factor in determining your credit score comes from your payment history. This is the number payments you have made towards paying off a debt that you owe. Paying your bills early or on time is very important and directly affects this large chunk of your credit score. It is better to pay down your debt over a longer period of time than it is to pay it off right away. Ideally you should pay more than the minimum payment but don’t just pay off your debt right away. Take your time and pay down your debt over a steady period of time to demonstrate you are responsible and are capable of paying your bills every month. A good example to describe this is, let’s pretend you have had a credit card for just 1 year vs someone that has had a credit card for 5 years. The person that has had a credit card for 5 years will have a high percentage in this area then you. How long have your accounts been open for? The longer your credit accounts have been open, the better your credit score will be. For many years I when I was 20’s I had the attitude that if I don’t have the cash in my wallet that I can’t afford something and while that theory seemed financially responsible it did in fact hurt my credit score. It is important that you establish your credit as soon as possible. Don’t wait and make the same mistakes I made.

30% of your credit score comes from the length of your credit history.
Are your credit cards maxed out? High credit balances can and will affect your credit score in a negative manner. Always strive to keep your credit balances below 50% of your credit limit. Ideally your goal should be to keep your balance below 35% for the most positive effect on your credit score. This means if your credit card limit is $10,000 that you should not use your charge card for more than $5,000.

15% of your credit score comes from recent credit inquiries.
Each and every time you apply for a loan or a credit card, you create an inquiry on your credit report. Every single time you apply for a loan or a credit card and an inquiry is made your credit score drops.
Having too many inquiries on your credit in a short period of time can and will have a negative impact on your credit score. As a good rule, don’t just apply for credit just because you have nothing better to do. Only apply for credit if you are financially responsible and need to borrow money and are fully capable of paying the loan or credit card off on time or early.

10% of your credit score is made up of new credit.
How many new loans or credit cards do you have and owe money on?
As mentioned above the longer you have credit history the better your credit score will be and establishing a new line of credit will make up approximately 10% of your credit score.

10% of your credit score is made up of what kind of credit you have.
Whether it is a credit card, an automobile loan, a mortgage, a school loan or another kind of debt.
Each kind of debt has its own place in determining this percentage of your credit score.

An important thing to consider is these numbers are approximate figures and nobody outside of the 3 credit reporting bureaus Equifax, Experian and Transunion knows the exact percentages that make up your credit score. Aside from this there are many mathematical algorithms the credit bureaus use to determine your exact credit score.


Overview of Credit Score Ranges

800 to 850+ Credit Score
A credit score above 800 is considered flawless. Believe it or not credit scores in this range are pretty common however I have never met anybody that has a credit score of 900.Many consumers have a credit score in the 800 range the moment their credit is established which is when you are 18 years old. However without a real credit history, that score means very little to lenders or banks. On the other hand, having a credit score in the 800-850+ range accompanies by years of rock solid credit history is a good indicator that lenders and banks will give you the lowest interest rate on everything from credit cards, automobile loans, mortgages, and loans. Credit scores in this range represent approximately 13% of the population.

720 – 799 Credit Score
A credit score of 720 – 799 is considered very good credit. Although this range is not considered flawless, you should qualify for most loans, although your interest rate will be a little higher than those who have a flawless credit score. There are certain situations where a credit score in this range will prevent you from obtaining certain types of financing, such as A Paper mortgage loans or the lowest automobile insurance premium. Just know that if your credit score is in this range you do have good credit.

620 – 679 Credit Score
Credit scores in this range are considered “fair or ok” by many lenders, banks and creditors. You will see you have further restrictions and fewer loan approvals when attempting to get a loan or a mortgage. Credit scores in this range are fairly common among consumers. If you know your credit score is in this range it is a good idea to check your own credit so you can evaluate your credit score and work towards improving your credit worthiness.  In this credit range you are not going to get very low interest rates and this means you are ultimately losing money as a result of just having ok credit.

580 – 619 Credit Score
Credit scores in this range are considered bad. Credit scores in this range are below average, and you will have a difficult time securing a loan, mortgage or even a credit card. If you are lucky enough to get approved for a loan you will definitely not get a good interest rate. If you know you are in this range then it’s definitely time to pull your credit report and take the appropriate steps to repairing your credit and improving your credit score. Many consumers in this credit range are considered “subprime” and may have to work with special bad credit banks or lenders to secure financing and you can count on having a high interest rate which is going to cost you more money than if you had a better credit score.

500 – 579 Credit Score
Credit scores in this range are considered poor. If your credit score is in this range, there is a very good chance you probably have a major derogatory mark on your credit report such as a collection, charge off, late payments on a loan, mortgage or credit card or even a bankruptcy. It is absolutely a must that you pull your credit report and carefully evaluate your credit report and history and take action immediately to repair your credit. You are clearly paying very high interest rates if you are even able to get a loan which is not likely going to happen. This kind of credit mess will impact your life for many years to come if you just ignore it.

Below 500 Credit Scores
Credit scores below 500 are absolutely horrible. To fall into this low range of credit, your credit report is going to definitely have major derogatory marks against you and your credit. If your credit score is in this poor range you are going to want to seek the help of a Fair Credit Attorney to review your credit and take appropriate action. Whether it be paying off your unpaid debts or filing for bankruptcy. A good credit attorney will be your best bet for seeking good financial and legal advice. This also means you should start educating yourself about how credit works so you can stay on top of your credit and understand how credit works.

So now you should have a basic understanding of credit scores and what you need to do to should you have bad credit.

Credit and Debt Myths

These is a lot of false information on the internet about credit scores, credit repair, the fair credit reporting act, credit laws, debt and finance.

Here is a little list I made to clarify some of these fair credit myths.

  1. Amount of debt DOES affect your credit score.
    “It was only a $75 unpaid debt so it shouldn’t affect my credit score very much”.

    Fact: It does not matter whether you have a $10 unpaid debt or a $10,000 unpaid debt. An unpaid debt is an unpaid debt period. Any unpaid debt that has been reported to a collection agency will lower your credit score.

  2. They never sent me a bill.
    “It’s not my fault I didn’t get the bill.

    Fact: Believe it or not, sending you a bill is not required by any credit laws and is considered a courtesy.
    Regardless of whether you get your bill in the mail or not, it is your responsibility to pay you bills on time. If you didn’t get a bill in the mail, it is your responsibility to contact whomever you owe money to to make sure you are making payments on time. At the end of the day it is your own responsibility to make sure your bills are paid and on time. If you didn’t get a bill and you know you should have received one in the mail, it is your responsibility to pick up the phone and call whomever you owe money to to pay your bill on time.

  3. My paid off accounts will automatically disappear from my credit reports.

    Fact: Legally, you do have the right to fair and accurate credit reporting. If you did in fact pay off a collection, it should  be reported as “paid collection with zero balance remaining”.  If the paid off debt still shows up on your credit reports  30 days after you paid the debt off then it is your responsibility to contact all parties involved and this means you need to send a written letter to the creditor, collection agency – if one is involved and the three credit reporting agencies “Equafax, Experian and Transunion”.  After you send the letters your credit report should be updated within 30 days. If not then you may need a credit repair attorney to help you and the Fair Credit Blog is a great resource for finding an aggressive credit repair attorney that can help you. Just be careful and don’t fall for the credit repair scams that are out on the internet.

  4. Divorce and your credit.
    “I hired an experienced  Orlando Divorce Attorney and  got my divorce and the family law judge ordered my ex to pay these unpaid bills. They should not be on my credit report any more”.

    Fact: If your name is still on the credit line, you are still responsible for any accounts that have your name on them, regardless of what a family law judge rules.  Here is how this works: You made a deal with a lender or racked up your shared credit cards with your ex and your name is also on the bills. This means you agreed to pay any money you borrowed back. It is not the creditors fault if your marriage is successful or fails.

  5. Collections and zombie debt reappearing after you pay your debt off.
    “I heard if I paid my old collection – debt off it will come back and haunt me and lower my credit score”.

    Fact: Debt collectors do not generally re-age debts and if they do they are breaking fair credit laws. If this happens then you definitely will want  the help of a fair credit attorney to get involved and help you.