How Is My Credit Score Calculated?

You can get a free credit score almost instantly from several sources. How do they come up with the credit scores, and how are they calculated? This is the question you should be asking.

The basis of any of your credit scores is easy enough to figure out. All the information you are looking for can be found by ordering your credit report here at credit.ly . The data from your credit report is plugged into an algorithm that spits out a number on a set scale. Voila: your credit score. Beyond that, it gets complicated.

The BIG Five Credit Scoring Factors

Think of credit scoring algorithms as a secret chocolate chip cookie recipe. The companies create the cookies. Credit scoring models (like FICO or VantageScore 3.0, for example) are understandably not keen on sharing the exact recipe. But, they do share some of the important things consumers need to do in order to earn a good credit score. They share the major credit scoring factors.

These are the things you should focus on if you want to build and maintain a good credit score. They can help you get a mortgage, buy a car, get a credit card and achieve a whole host of other financial goals.

You need quality ingredients to make an amazing cake, and the five major credit scoring factors are your ingredients. Here’s the down and dirty of what you need to know:

1. Payment History – Have You Been Responsible?

Your payment history is the largest influencer of your credit scores. In fact, it makes up roughly 35% of your credit scores. That’s HUGE, more than any other single factor. So it’s quite important. Payment history is the good the bad and the ugly about the record of whether you pay your bills on time or not.

The payment history appears on most credit reports from the three major U.S. credit reporting agencies. These agencis are TransUnion, Equifax and Experian. The history isn’t always complete and can often be wrong, so getting a copy of your credit report is key. What you see on this report often referred to tri-merge. This is the history painting a picture on how you use credit. All from credit card payments, installment loans (like a car payment), finance company accounts and mortgages.

The main reason your scores carries such a significant weight is that it best reflects whether you’ll repay your loans on time. Just like as a responsible person should do. Or if you’re going to be a risk in the eyes of lenders. If you’ve missed a payment here or there, it will have a negative impact. Though that negative impact fades with time as long as you don’t make any other late payments in the meantime. And if you have a pristine repayment history, congratulations. But don’t expect perfect scores. There are still four other factors to consider.

Negative items that could lower your score: Late or missed payments, accounts that go to collections, liens, foreclosures, bankruptcy and judgments.

2. Debt Usage – Don’t Max Out Your Cards

The amount of debt you carry is the second largest influencer recognized on your credit scores, making up roughly 30% of your scores. Having a small amount of debt won’t damage your scores, but you don’t want to max out credit cards if you’re trying to improve your credit.

The debt sweet spot

So how do you know where the debt sweet spot is? The general rule is to keep the amount of debt you owe on your credit cards below at least 30%, ideally 10%, of your available credit line. (You can read this guide to learn more about how much debt is too much debt). Keep in mind that this ratio of the credit you’re using to your total credit limits. That means credit utilization. This is determined based off of the credit card balances reported to the credit bureaus, which are often your statement balances. This confuses many people who pay their credit cards in full every month. Their credit report shows a balance, but they know they’re paid in full.

The amount that’s reported to the credit bureau is what matters for your credit utilization. The balance you’re actually paying interest charges on does not. Some people opt to pay off their credit cards before the statement balance is created in order to show a $0 statement balance and a low utilization. Credit reports aren’t updated in real time, so it can sometimes take up to 60 days for updated information to show up on your credit reports.

Negative items that could lower your score: Things that will make you look like a high credit risk, like having maxed-out credit cards or too many accounts with high balances.

3. The Age of Your Credit – Age Does Matter

This aspect of your credit scores considers the age of your accounts, not your age.  How long you’ve managed credit is one determiner of your credit scores that you have very little control over. And time is the biggest influencer.

This factor accounts for roughly 15% of your credit scores. It also looks at your track record of how long you’ve had various credit accounts. Also how you’ve managed them during that time. The longer you’ve had credit, the better. Of course, no matter how long you’ve had the credit, managing it well is still quite important.

Factors that can cause a lower credit score: Recently opened accounts that don’t have a track record, no credit history or very little history.

4. Types of Accounts – Diversify When Possible 

The different types of accounts appearing on your credit history are also called your “credit mix”. They make up about 10% of your credit scores. Two major account types are considered: Revolving credit (accounts with different payments each month based on a balance, like credit cards). The other is installment accounts (a loan with a fixed payment over a given span of time, like student loans or a mortgage).

There is no real “ideal” version of a credit mix, as what’s right for you might not work as well with someone else’s credit profile. It isn’t essential to have each one, but it’s a good idea to have a variety to show you can responsibly manage different types of debts.

Factors that could lower your score: Only having one type of credit account like credit cards in your credit history

5. Your History of Applying for Credit – Slow and Steady

The number of credit inquiries appearing on your history makes up about 10% of your credit scores as well. Basically, this is tracking whenever your credit reports are pulled. That means every time your consumer credit file is reviewed, it is documented for a new credit card or loan application. This tells lenders how actively you’re shopping for credit and how frequently.

There are two general categories of inquiries that can appear on your profile — hard inquiries and soft inquiries.

Hard inquiries appear when you apply for some form of credit from a lender. This can include a car loan, student loan, mortgage, new credit card (whether applying online. And from a “pre-approved” mail offer, or retailer at the register) and more. The best way to think of this is when you purposefully choose to have your credit reviewed in order to get a new line of credit. These inquiries stay on your credit reports for 2 years but only have a negative impact for the first year. They can be seen by lenders or anyone who pulls your reports.

Soft inquiries don’t usually hurt your score. They are a record of having your individual credit pulled for a reason other than determining your eligibility after a credit application. This can include asking for a copy of your own credit reports. You can do this for free once each year by visiting Annual Credit Report.  Annual Credit Report is a promotional review that sends you information about a credit card pre-approval. Also potential employers looking at a version of your credit reports as part of a job application process. or a lender you already have credit with reviewing your reports.

These inquiries only stay on your reports for 24 months and don’t appear to anyone who reviews them, other than you. They also do not impact your scores but are included on your credit reports. You can know who’s looking at your credit profile.

Experian Rent-Bureau – How Renting can Impact Your Score

With a lot of Americans renting these days, a common question is “does renting impact my credit score?” The answer is, “not always”. Usually, when a renter’s history only shows up on credit reports when it has already gone bad. This is usually in the form of a judgment or a collection if a renter owes money on the rental. Experian Rent-Bureau, another division of Experian, allows for landlords and property managers to report rental history. Reporting both the good and the bad. This helps property managers and owners screen tenants. It also helps tenants with good rental history to build credit. Experian allows this to show up on consumers’ credit reports when property owners and managers report information. And they report it to Experian Rent-Bureau. This can ultimately help build a better credit score.

Credit Score Ranges  – Where Do You Stand

Credit score ranges can be found from bad credit up to excellent credit. It is important to understand where you fall on this credit score list. You should take the proper steps to rebuild or fix any credit issues you may have to secure a better financial future.

History Lesson

Back in 2017, the average consumer FICO score was reported to be approximately 700. Twenty percent of scores fell beyond the 600 mark. More than fifty percent of scores were actually found to be above 700.

According to a report coming from Experian, we found that the average credit score around the same time was 675. This was when looking at the VantageScore 3.0.

How Does My Credit Score Affect Me? – Truth Be Told

A poor credit score or the lack of credit history is not a place you want to be in. This means you will be facing challenges in the future if you ever needed to obtain a line of credit. You may still be able to get some form of credit with even with a 500 credit score. You will most likely then be faced with abnormally high-interest rates even with a credit score in the 500’s. This is not a good place to be in because of the elevated risk of lending to someone with such a low credit score.

If you are finding these challenges to be more than just an inconvenience, you should take a closer look at your credit reports and your credit scores. This is to see where you can improve. Over time your credit score will increase.

Calculating the breakdown of your credit score

Calculating the breakdown of your credit score is the first positive step in the right direction. This allows you to take a closer look into your finances to see where you may need to spend less, pay more, or avoid higher interest. The income you bring to pay off your loans and monthly debt will also play a significant role in credit score calculation. Furthermore you will want to also pay attention to your expenses if you are making enough to cover everything comfortably per month.

The debt to income ratio is a vital part of any credit score. This will give the lenders a better idea of what you will be able to afford and maintain in terms of a repayment plan.

To start building your credit or improving your score, be sure to get your credit report here at credit.ly. Go through each detail on the reports from the three credit bureaus and look for any mistakes or inaccuracies there may be. Learn more by searching thru the Creditly free resource guide.