Your credit score is a numerical representation of your creditworthiness, calculated based on several factors. Understanding how your credit score is calculated is essential to improving and maintaining a good credit score. This article will discuss the factors in calculating your credit score and how each affects your overall score.
Payment history
Payment history is the most critical factor in calculating your credit score, making up 35%. Payment history refers to whether you have made your payments on time. Late payments, missed payments, and accounts in collections can all hurt your credit score. On the other hand, making your payments on time can help boost your score.
Credit utilization
Credit utilization is the second most critical factor in calculating your credit score, making up 30%. Credit utilization refers to how much credit you are using compared to how much credit you have available. You should keep your credit utilization below 30%. If your credit utilization is too high, it can indicate to lenders that you are overextended and may be unable to make payments in the future.
Credit history length
Length of credit history is another important factor in calculating your credit score, making up 15%. This factor looks at how long you have had credit accounts open. The longer your credit history, the better. Lenders want to see that you have a history of responsible credit use over an extended period.
Types of credit
Types of credit make up 10% of your credit score calculation. This factor considers the kinds of credit accounts you have, such as credit cards, loans, and mortgages. A mix of different types of credit can show lenders that you can handle different types of credit responsibly.
Recent inquiries
Recent credit inquiries make up the final 10% of your credit score calculation. This factor looks at the number of times you have applied for credit recently. Each time you apply for credit, it results in a hard inquiry on your credit report, which can negatively impact your credit score. Recent inquiries can indicate to lenders that you are desperate for credit and may pose a higher risk.
Factors that go into calculating your score
Now that we have discussed the factors that go into calculating your credit score, it’s important to note that different credit bureaus may use slightly different algorithms to calculate your score. The most commonly used credit score is the FICO score, which ranges from 300 to 850. However, other credit scoring models, such as VantageScore, use different factors and weighting systems.
Some factors carry more weight than others
It’s also important to note that some factors, such as payment history and credit utilization, carry more weight than others. As such, focusing on these factors can have the most significant impact on your credit score. Paying your bills on time and keeping your credit utilization low are two of the most effective ways to improve your credit score.
In conclusion, understanding how your credit score is calculated is essential to improving and maintaining a good credit score. Payment history, credit utilization, length of credit history, types of credit, and recent credit inquiries are the factors calculating your credit score. By paying your bills on time, keeping your credit utilization low, and maintaining a healthy mix of different types of credit, you can improve your credit score and increase your chances of getting approved for credit with favorable terms and interest rates.