Credit scores can be intimidating things. If you’ve ever checked your credit score and saw that three digit number staring back at you, you’ve probably wondered, how is my credit score calculated? We’ve setup this guide to help you digest what goes into calculating your score and how each individual category gets scored and ranked.
CREDIT CARD UTILIZATION – HIGH IMPACT
This is a fancy term and can cause some confusion and panic for people. Credit card utilization simply is the amount of money that you spend on all your credit cards combined. Credit card lenders like to see that you do not spend all the available credit that you were awarded by them. The more credit that you spend the more difficult it is to repay.
Here is how they calculate your credit card utilization: Your total credit card balance on all your accounts / your total credit card limit = Your credit card utilization
PAYMENT HISTORY – HIGH IMPACT
Lenders often look at your on-time payment history to determine whether you are likely to make future payments on time. Even one late payment could hurt your credit score, so be mindful of your due dates.
Here is how they calculate your on-time payment percentage: Your on time payments / Your total payments = Your on-time payment percentage
DEROGATORY MARKS – HIGH IMPACT
Derogatory marks may include accounts in foreclosure, bankruptcy, collections, or tax liens and can severely impact your credit score.
Here is how they calculate your derogatory marks: Open accounts in collections + Negative public records = Total derogatory marks
If you haven’t already, automate your bills to make monthly payments more convenient. This will help prevent accounts from becoming past due and then going into collections.
AGE OF CREDIT HISTORY – MEDIUM IMPACT
The longer you responsibly manage your credit, the more you demonstrate to lenders that you are worthy of them giving you credit.
Your age of credit history is calculated by averaging the ages of your open credit accounts.
Improve your age of credit history over time by keeping your accounts open and in good standing. Consider becoming an authorized user or joint account holder on someone else’s account to build your credit. If you’re considering closing a credit card that charges an annual fee, first contact your bank to find out if they will waive it or if you can downgrade to a card that does not have an annual fee. Use your older cards regularly to make sure the issuer does not close them due to inactivity. Remember to pay them off at the end of the month!
TOTAL ACCOUNTS – LOW IMPACT
Lenders like to see several various accounts on your credit report because it shows that other lenders have trusted you with credit.
Here is how it is calculated: Your open accounts + Your closed accounts = Your total accounts
Focus on keeping your current accounts in good standing. If you do not need more credit, it is often not worth the risk of creating additional debt by opening more accounts.
CREDIT INQUIRIES – LOW IMPACT
Applying for a line of credit will typically resulting in a HARD credit inquiry. A high amount of hard inquiries on your credit report may suggest that you are desperate for credit or are not getting approved by other lenders.
Try to avoid unnecessary hard inquiries. Before you open a new line of credit, check to see if you have any pre-qualified credit card offers before you apply so you are less likely to get turned down.
Now that you’ve learned how your credit score is calculated and how you can maximize it; learn how to maximize your income to improve your financial life and start your journey to financial independence.