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.

 

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