How is Your Credit Score Calculated?

You know that the information found in your credit report determines your credit score, but how do they turn the information into a number?

Every time you apply to borrow money from a lender, be it a loan or a credit card, your credit report and score will be scrutinized. This score often dictates whether or not you will be approved for credit.

Credit scores range from 340 to 850, and are used to determine whether or not it is likely that you will pay back the loan. The lower the score, the higher the risk that you will not pay back the loan. For example, a borrower with a score of 439 is less likely to pay back a loan than a borrower with a score of 712.

Before you apply for a loan, you should have an idea of ​​what your credit score is. At least once a year you should review your credit report to make sure it is accurate. What is found on your report will reflect in your score.

The three credit bureaus – Equifax, TransUnion and Experian – all use different computer software that takes the information in your credit report and generates it into a numerical score. Each bureau may report a different score, which can range by as much as 100 points. For example, my husband actually is one of those people who has a 80 point spread between his highest and lowest score. Others, like myself, will have three scores that are all within a point or two of each other. It is just one of life's mysteries.

Your credit score is calculated using the following information from your credit report:

  • 35% Payment History – Do you pay on time, every time?
  • 30% Amount Owed – How much do you owe your lenders?
  • 15% Length of Credit History – How long have you been a borrower?
  • 10% Types of Credit – Do you only have credit cards?
  • 10% New Credit Obtained – Have you been on a shopping frenzy?

Your payment history looks at the last seven years of your accounts. Have you paid your bills on time each month? The history will include open and closed accounts, negative accounts and collections and any delinquent accounts you may have.

The amount owed looks at how much credit you have and how much you owe your lenders. You want to show that you have little revolving debt owed when compared to how much you have available. This shows how frequently you pay off your debts and how much is building over time. Lenders don't want to see borrowers that are maxed out on all their cards. This makes you a risk.

The length of your credit history shows how long since you have opened an account. A long credit history shows that you continue to make your payments and be a good borrower.

The types of credit you use repeat on what type of borrower you are. There are mortgages, credit cards, auto loans, secured loans and subprime loans. You should have several different types of credit, not all credit cards.

In the past six months, how much new credit have you obtained? If you have been on a shopping spree, it will lower your credit score.

Take steps to increase your credit score. Look at what will have the most impact – your payment history. Start paying on time, every single month. Take care of any delinquencies and past due accounts. Then start paying down your debt as much as possible. Work on a longer credit history, which simply takes time. Make sure that you have a balanced amount of secured and unsecured debt. Finally, try to space out your financing so that you aren't obtaining all of your new credit at once.

Source by Martin Lukac

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