What’s in a Number? A Look at How Are Credit Scores Calculated

Did you know that 30% of Americans are considered to have poor credit, and some people don’t even have any credit at all?

Most people have a vague sense that credit exists and that you want to have a high credit score. How much more do you know about it than that, though?

It’s time to answer the important questions, like: how are credit scores calculated?

Let’s take a look into everything you need to know so you can keep your credit score as healthy as possible.

Payment History

The biggest factor in determining your credit rating is your payment history. This makes up 35% of the score you see on your credit report.

What is payment history? It’s the record that shows up on your credit report that details whether or not you’ve been paying your bills on time.

There are three major credit reporting agencies in the U.S.: Equifax, Experian, and TransUnion. You’ll see a payment history appear and the reports you get from each of these. The payments that payments histories are concerned with include mortgages, credit card payments, finance company accounts, and installment loans.

There might be different information on the three different bureaus because not all creditors will send your information to each separate bureau.

So why is payment history such a big part of the credit score breakdown? Basically, whether or not you’ve been timely with your bills is a big indicator to lendors about how much of a risk you are.

It’s going to have an negative impact on your credit score if you miss payments every once in a while. The impact of having made late payments will fade over time, so if you’re good about making ontime payments in the future your credit score can improve.

Credit Utilization

The next biggest factor when it comes to your credit is the amount of debt you carry. This makes up for just about 30% of your credit score.

A number of different kinds of debt show up on your credit report. The debt that credit utilization refers to, however, is specifically revolving debts. Revolving debts are debts like home equity lines of credit and credit cards.

It won’t be bad for your score if you have a small amount of debt. If you’re maxing out your credit cards, though, you’re not helping your credit. The general rule of thumb is that you want your debt to be below 30% of your available credit line, and ideally it would be below 10%.

Credit Age

Basically, the longer you have had a credit history, the better off you are in this category. It amounts for about 15% of your total credit score.

This means that you don’t want to close the accounts you’ve had for the longest unless you absolutely have to. This is because having long standing accounts is a part of what is keeping your credit score healthy.

If you don’t have much in the way of credit history, there isn’t much you can do except let time work it’s magic. It’s a good idea for people to have means of creating credit age from a fairly young age to give them a leg up when they become adults.

Types of Accounts

The types of accounts you have in your history amount for 10% of your score, roughly. This is also called your credit mix.

There isn’t a perfect credit mix composition, but it’s a good idea to have a variety of different types of accounts. This is because having accounts of different types shows creditors that you are able to manage different kinds of accounts responsibly.

Your Credit Application History

About 10% of your score is how many credit inquiries appear on your history. This is tracking how many times your credit reports are pulled.

Maybe you didn’t realize it, but every time you apply for a loan or an application, the fact that your consumer credit file was reviewed is documented. The reason this is important is because lenders want to know how often and how actively you’re shopping for credit.

There are two different kinds of inquiries that could show up on your credit profile. These are soft inquiries and hard inquries.

Hard inquiries show up when you apply for things like mortgages, car loans, student loans, and new credit cards. Basically, they appear when you apply for credit of one kind or another from a lender. Hard inquiries will stay on your report for two years, but the negative ding only counts for one year.

On the other hand, soft inquiries happen when your credit is pulled for some reason other than a credit application. This type of inquiry is only visible to you, doesn’t hurt your score, and only stays on the reports for two years.

Additional Factors That Can Affect Your Credit Score Rating

There are a few things that might also impact your credit score. These include your rent payments, utility payments, and taxes payments.

Want to know how to repair your credit all on your own? Check out this article to learn how long it takes.

When You Know How to Answer “How Are Credit Scores Calculated?” You Can Better Manage Your Own Credit Score

Learning about how credit scores work can be confusing and overwhelming. Many of us enter the adult world without having any sense of how our actions might be harming our ability to get a future mortgage or loan. That’s why it’s important to learn about how are credit scores calculated as soon as possible, so you can make sure to keep your score healthy or repair your unhealthy score.

Is it time for you to get your credit score back in order? Contact us today to get a free fifteen minute credit review!