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How Is My Credit Score Calculated?

December 24, 2017
Credit Score Calculated

A person’s credit score is one the most important “numbers” in their life. Unfortunately, few people are aware of what it is, what it is used for, and how it can impact your life. Understanding your credit score is an important part of proper financial planning and money management. With the right tools and information, anyone can learn how to boost their credit score and reap the benefits that come along with it.

What is a Credit Score?

In a nutshell, a credit score is the number that is generated based on open credit accounts, loan amounts, payment history on debts, and unused credit. Different types of credit and credit inquiries can impact your overall score differently. For example, if you are interested in moving into a new apartment, the credit check is deemed a “soft hit” and is therefore less likely to drop your score. However, if you are interested in financing a car, this “hard inquiry” will likely cause a temporary drop in your score. Additionally, credit card usage and limits weigh heavier than things like personal loans.

Your credit score is broken down and calculated by five different details:

Credit Mix – This refers to the different types of credit which you have including store credit cards, bank credit cards, automotive loans, and mortgage loans. Your credit mix makes up for 10% of your score.

New Credit – When you open a new line of credit, it is considered new. This can have a temporary negative impact on your score. Your amount of new credit makes up 10% of your credit score calculation.

Credit History Length – The longer you have a credit account in good standing, the better it is for your score. It is recommended that even if you do not use a credit card you own, you should continue to keep it open to benefit your revolving credit amount. This accounts for 15% of your score calculation.

Amount Owed – Commonly referred to as your usage amount, this is the percentage of your available credit which is used. It is recommended that usage remain below 30% of the available credit. Your usage amount accounts for 30% of your credit score calculation.

Payment History – The largest factor in your credit score is your payment history. Companies who may want to offer you a loan will review this information to find out how successfully you have maintained your credit and paid off accounts. Past due payments can have an adverse impact on your score. Payment history contributes 35% of your credit score.

What is it Used for & How Does it Impact Life

An individual’s credit score is one of the most important defining factors in qualifying for different types of credit. It is used to help companies make a variety of decisions about your financial worth to their company. Low credit scores can result in additional deposits on utility bills or cellphone plans as well as disqualify you from being eligible for certain types of loans. The higher your credit score, the lower interest rates you may be eligible for on high dollar amount financing including buying a car or home.

Your credit score impacts nearly every aspect of your life. For this reason, it is vital that consumers keep themselves in good financial standing. If you are struggling to manage your current debt, contact SM Law Group for assistance in debt consolation and settlement.

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