The Credit Score and How It’s Calculated

Calculating The Credit ScoreOne of the first steps toward having outstanding credit is to understand credit scoring and the uses of it.

Maybe you’ve spent a long time telling yourself that good credit didn’t matter; you would buy everything with cash.  But did you know that your credit score is used for everything from getting a job to renting an apartment?  When you give your social security number over to a potential employer and find you don’t get the job, it may not be your fault: don’t be surprised if your credit rating had something to do with not getting the job.

The problem for many people is they don’t fully understand how the credit score is calculated.  Even if you have credit, you could still be looking at having a low score if you don’t know how to properly distribute your credit.  This is why you need to understand the breakdown and ways that credit bureaus calculate a credit score.

 

Know the credit score breakdown

The first thing you need to know is the  breakdown.  Everyone is subject to the same breakdown, so don’t worry that you’re being categorized.  Here’s the way it’s broken down:

–  The biggest category is your payment history.  It makes up 35% of the credit score.  In other words, even if you have bad credit right now and you can improve your credit rating by making your payments on time each month.

–  The second largest category is the way you use your credit.  It makes up 30% of the credit score.  This is the ratio of money you owe compared to the total limit of the account.  You want to keep your balances under 30% of what your credit limit is.  How many credit cards do you have that carry balances?  In short, this measurement is the way you use your available amount of credit.

–  15% of the credit score comes from your credit history.  Having a long credit history that is active and in good standing  can improve your score.  If you do not have a long credit history, there is a solution that can get you years of credit history with less than 10 minutes of work.  It is 100% legal and it’s explained in the Credit Repair Doctor.  To find out more click here to learn how easy it is.

–  New credit and the types of credit you use are each 10% of the credit score.  So, keep the amount of new accounts you get to a minimum and diversify the type of credit accounts you have. This means having different types of accounts on your credit report such as Mortgage, car loan(s), student loans, credit cards, installment loans, etc.

This is how your FICO scores are calculated.  Since this is the most commonly used credit score, this is what you should focus on.

 

How the credit score can be improved

Now that you understand the breakdown, let’s talk about more ways to improve your score:

–  Reduce the number of inquiries on your credit report.  Each time you apply for credit or utilities, they access your credit report and that counts as a credit inquiry.

–   As I mentioned before, the longer you’ve had an account, the better your score (especially with good payment history).

–   Keep your balances on revolving accounts low.  Aim for no more than 30% of your total amount of available credit.

–   Pay everything on time.  I know I said this before, but it cannot be said enough.  One of the very best things you can do from this point on to improve your credit score is to make all of your monthly payments on time, no matter what.

–   If you’re able, pay extra on the principal of loans.  If you pay off your credit cards, keep the accounts open and active for their long credit history.

 

Now that you know how the credit score is calculated,  you can make this your year to have good credit and use the scoring methods to your advantage!

About the Author

Jeremy Maher dealt with harassing collector calls, debts piling up and damaged credit for years. He improved his situation and started helping others.   That leads us to today, where Jeremy has DIY solutions for stopping collection harassment, eliminating debt and improving your credit scores. His clients can improve their situation within the comfort of their own home.

Leave a Reply 4 comments