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The Truth About How Your Credit Scores are Calculated

July 15, 2022

Whether applying for a credit card or a mortgage, a good credit score is a must to receive approvals with favorable terms. However, it is challenging to know what steps to take to improve your credit score without knowing what factors carry the most weight.

With so many of your future financing options relying on your credit score, it is essential to understand how it gets calculated. Thus, we created this quick guide to break down how your scores get calculated and what you should focus on to increase your credit score.

What is a credit score, and why is it important?

A credit score is a three-digit number that acts as a summary of your credit report. Your credit score helps lenders determine the likelihood of you repaying a loan, ultimately deciding whether they will extend financing to you or not.

Banks and credit issuers view hundreds of applications every day, and a consumer’s credit score acts as a quick way for them to judge your creditworthiness without combing through your entire report.

Fortunately, since your credit score is reflective of your financial habits, it is entirely within your control to positively influence it by paying your bills on time and being mindful of the debt you carry.

Having a good credit score is important to your overall financial health since it helps consumers gain access to the credit they need to buy a home or pursue higher education.

Additionally, a stellar credit score can save you thousands of dollars over time by helping you secure low-interest rates and avoid paying fees.

How are credit scores calculated?

Your credit score considers five categories reflected on your credit report: payment history, amounts owed, length of credit history, new credit, and credit mix.

However, each category is weighted differently, so some will affect your score more than others. When calculating your score, each category affects the following percentage of your score:

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • New credit – 10%
  • Credit mix – 10%

Knowing how heavily a category impacts your score will not do any good unless you understand what it means and how you affect each.

Payment History

The primary concern of every lender is whether your previous credit accounts have been paid on time, which helps them determine how likely you are to pay future credit accounts on time.

One or two late payments will not destroy decades worth of positive payment history but may decrease your credit score. An overall positive payment history usually can outweigh one or two instances of late payments, but that does not mean you should disregard your due dates.

The accounts that play a role in determining your payment history include credit cards, retail accounts, installment loans, mortgage loans, public records, and finance company accounts.

Amounts Owed

Carrying a balance on your credit card accounts does not equate to being a high-risk borrower, but maxing out all your credit accounts at once can indicate that you are overextended.

To any potential credit issuers, this can make you appear likely to default on these payments.

This category generally refers to the total debt you carry, but your credit utilization is the significant figure that can impact your credit score.

To maintain a healthy credit utilization ratio, you should aim to keep your utilization on each account under 30%, but those with excellent credit scores tend to keep their utilization below 10%.

Length of Credit History

Having a long track record with credit impacts your credit scores positively because it shows lenders you can use credit responsibly over a long period.

This category considers how long your credit accounts have been open, how much time has passed since you used an account, and the age of your oldest and newest accounts.

Not having a long credit history does not translate to getting your loan application declined, but it still plays a role in configuring your credit score.

Credit Mix

The types of credit accounts you hold are known as your credit mix. Lenders like to see that you can use and repay different credit accounts, but that does not mean you have to go open one of each.

Your credit mix can include credit cards, retail accounts, auto loans, mortgages, and more. Although this category only accounts for 10% of your credit score, it remains a factor that lenders consider.

However, you should not apply for all different types of credit simultaneously, as this can do more harm than good since it would lower your age of accounts and create an excessive number of inquiries.

New Credit

As mentioned above, a credit inquiry occurs when you apply for credit. These inquiries stay on your credit reports for two years but only impact your credit score for 12 months.

Opening too many new accounts within a short period represents a greater risk to potential lenders, especially those who do not have an established credit history.

This category will consider how many new accounts you have, how many recent inquiries you have, and how much time has passed since you opened your last credit account.

It is best to open a new account and show positive payment history for 4-6 months before applying for anything further.

Like every credit report, each credit score is unique to the consumer, so the importance of each category may affect an 18-year-old differently than someone with a more extensive credit history.

As the information on your credit report changes, your credit score will fluctuate, which is why it is important to monitor your credit.

Regularly reviewing your credit reports from all three of the main credit bureaus will ensure you always know how each of these categories affects your credit scores.

You can monitor your credit reports and scores from Experian, Equifax, and TransUnion using Fund&Grow Credit Services. They will even alert you of any changes to your credit reports in real-time, so nothing will ever go undetected.

Sign up for Fund&Grow Credit Services today!


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