One of the most important things about improving your credit score is knowing how it’s calculated. There are several key factors used in determining your credit score and in this article we’ll discuss them.
There are several methods of credit score calculations but the most popular one is FICO. We won’t be going into too many details about its origin since it’s not important.
A person’s credit score can range from 300 to 850. The exact formula for determining it is not publicly released, but fortunately plenty of information about it is available if you know where to look. Here’s a breakdown of the calculation of a credit score:
- 35 percent of your credit score is based on your payment history.
- 30 percent of the score is based on outstanding debt.
- 15 percent of the score is based on the length of time you’ve had credit.
- 10 percent of the score is based on new credit.
- 10 percent of the score is based on the types of credit you currently have.
The first thing lenders look at and the most important factor is your payment history as all lenders first and foremost want to know if and how frequent you are paying your bills. Any bankruptcies and debt collections also come into play in here, especially if they are recent.
Outstanding debt is the second thing these companies look for. Your credit card limits, home loans or car loans and more are all in here. If you possess more credit cards at their limits and have more loans the score will be lower. It’s a good practice to keep all your credit cards a 1/4 of their limits or higher.
The length of time you have had credit is a very important factor as well. You see, the longer you have credit is actually better for your credit score! It’s because the companies have better insight into your payment history and can better predict your future payments.
Opening new credit accounts will lower your credit score for a short periods of time. If you frequently inquire about credit you may even get a negative credit score for that so be careful.
The last 10 percent of your credit score calculation is based on the types of credit you already have. The companies look at whether you’ve had experience with a variety of credits and loans and improve your credit score appropriately.
You should remember that some lenders have additional credit score factors in their calculations as well such as your salary or how long you’ve been employed. Those factors often can not be controlled by you however they can still be improved — but we’ll discuss that part in one of the next articles.
If you want to find out (for free!) what your credit score is be sure to check this out.