How Your Credit Score is Calculated?

While a credit score’s importance is well documented, how is a credit score calculated? There are many factors that determine a credit score. Let us take a look at what goes into your score.

Bill History

The way that you pay your bills is a big factor in how good your credit score will be. In fact, it makes up about 35% of your credit score, which is the largest single factor. If you have always paid your bills on time, this section of the score will look good. If you consistently pay your bills late and sometimes miss payments, it will be adversely affected. This section of the score also looks at how many accounts have been sent to collection. Bankruptcy is considered very negatively in this section of the score.

Debt Ratio

The amount of money that you already have on credit is a big factor in your credit rating. Credit bureaus keep track of all of the different accounts you have and how much credit you have with them. If you are overextended, your score will be adversely affected. If you want your score to increase, try paying off some credit cards and getting rid of the credit lines. Credit bureaus know that the more credit you have, the more tempted you are to spend. This section makes up about 30% of your overall credit rating.

Credit History

The length of time that you have had credit plays a factor in your credit score as well. If you have had credit open with the same companies for an extended period of time, this reflects favorably on you. This part of the process makes up about 15% of your score.

Credit Mix

Do you have a long list of a certain type of creditor or do you have several different kinds? This plays a part in deciding how good of a credit risk you are. If you only have a collection of credit cards then you are not as attractive as someone with a healthy mix of creditors. Combining revolving credit with installment credit is the most attractive to prospective lenders. When you have a couple revolving accounts combined with a mortgage and car loan, lenders know that you can handle your money properly. This adds in about 10% of the total.

Credit Inquiries 

Checking to see if you can get new credit repeatedly does not look good on the system. Typically, the last step before defaulting on everything and applying for bankruptcy is looking for credit. When you can shift all of your debt into another loan or credit line, it keeps you afloat for a little while longer. No one wants to file for bankruptcy, so frequent credit inquiries might be a way out. Luckily, when you shop around for the best rate on a loan, this type of inquiry will not affect your score. This part of the model makes up 10% of your score.


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