How are credit scores calculated?

Wednesday, July 4, 2018 - 20:15

Rebuilding Credit

If you’ve found yourself with a bad credit score, you may be concerned with how you got to this point and how to recover. There are several factors that could have resulted in your bad credit score. Let’s take a look at those factors. 

Payment history: Your payment history is one of the major factors that affect your credit score. It takes into account whether you have paid your bill on time, the duration of delinquencies and also whether there are any current delinquencies. Late payments, delinquencies, bankruptcies, civil judgments, liens and debts that have been turned over to a collection agency all affect your credit rating adversely. Most people don’t realize that payments made a couple of days late result in one month past due on your credit report.

Existing debts: The main reason for you to have good credit is to look good in the eyes of creditors in case you need a loan. That is not likely to happen if your credit utilization, which is a ratio obtained by dividing the amount of debts by your credit limits, is high. The higher your credit utilization the lower your credit score will be. Ideally, your credit card balances should be less than 30% of your credit limit.  

Duration of credit history: Creditors like it when you have long credit history because it gives them more information about how you spend your money. At times, it may work to your advantage to leave accounts open even if you barely use them.

Inquiries for credit: You may find it unfair, but each time you file an application for a loan, it affects your credit score. Too many inquiries may give creditors the impression that you are either in financial trouble or are taking out too many loans. All inquiries made within a year are considered in the calculation of your credit score.

Mix of credit types: Having a good mix of different types of credit in your records is favorable for your credit score. Credit is mainly categorized into revolving accounts (credit cards) and installment accounts (mortgage, car loans and others). To have a higher score, you must have a careful balance of both types of accounts. 

The two most important things you must pay attention to if you want to build and maintain a good credit score are your payment history and existing debts. If you make all your payments on time and keep your debts low, then your score will automatically go up. To find a more complete breakdown of your score, check out the Equifax website.