5 Ways Your Credit Is Calculated

Your Credit Score is the Most Important Number in Your Life. What, Exactly, Are the Factors That Go Into Calculating this Figure, and How Can One Boost Their Credit Score and Avoid the Pitfalls of Bad Credit?

Almost everybody in the United States has a credit score, and at least a few lines of personal credit upon which they rely to grow and succeed in life.

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Your credit score is a particularly important number. It dictates to lenders, banks and financial companies your creditworthiness—or your ability to obtain credit based on responsible payments that have been made, on time, without overusing your credit lines. Bureaus use certain scoring models which account for the above-mentioned factors, amongst others, to judge and update a person’s personal credit score every few weeks. The more creditworthy a person is, the better chances they have at being offered lower interest rates on mortgages, car loans or insurance rates, paying lower premiums, monthly installments, and living an overall healthier financial lifestyle. However, if someone has dings or severe enough drops in their credit, lenders will refuse loans, banks will not accept credit card applications, and it becomes increasingly harder to progress further, which in turn can make a person’s life—and their family’s—much more difficult. Here are the five main ways which credit bureaus use to determine your credit score, and the best methods to ensure your creditworthiness stays high!  

 1. Payment History  

Payment history, which accounts for 35% of your total credit score, is in fact the most important factor used when determining this figure. Payment history lets lenders know how and when you’ve paid your past or outstanding open accounts, relative to the periodic due dates for payments needed on those credit lines. This factor will hugely determine if lenders will lend you credit, and is based on whether you’ve paid early, on time, 30 days late, 60 days late, and 90 days late—which you should definitely avoid! The accounts considered in your payment history include credit cards, installments for both auto and mortgage, public records, lawsuits and garnishments that are reported on your credit file.  Payment history is calculated in a relatively simple way. For example, if you have an account which has been open for 12 months, and you made on-time payments for all 12 months—your payment history would be 100%! However, if you were late one of those months, you would have made 11/12 on-time payments, which means a payment history of 91%. Keep in mind—in order to have a great payment history, you must stay above 98!

2.  Credit Card Usage

 The second biggest factor in calculating one’s credit score is credit card usage. Say you have a $10,000 line of credit—that doesn’t mean you should use even near that amount! The rule of thumb is to never use up more than $3,000 or 30% of your credit card or line of personal credit. When you go over a third of your credit card usage, you could possibly become labeled as high risk by lenders and bureaus. Even if you make your on-time payments, you could still be damaging your score by retaining a high balance on your line of credit. Some ways to combat this issue include making a large payment, which will lower your credit card usage and boost your score, or add an authorized user to your account or credit line.  

3. Credit Age  

The third factor used in calculating your credit score is your credit age. Credit age is simply how many months or years you have had an account or credit line open. A best practice is to not close any accounts if at all possible; doing this could damage your credit age by reducing it. Having more accounts open for longer generally boosts your credit health immensely. Your credit age is calculated by taking the average age of all your accounts, and then dividing it by the number of open accounts listed on your credit report. To have a good credit age, the general rule is to have accounts open for 5 years or more. Keeping them open and paid on-time longer will ensure a great credit score!  

4. How Often You Pull Your Credit

 The fourth factor considered by bureaus when determining your score is how often you pull your credit. A credit pull is essentially when you apply for a larger scale loan or credit request, such as a mortgage, car loan, apartment rental, expensive electronics, etc. The lender, bank or financial firm from whom your are requesting credit (or to purchase something with borrowed funds) will either do a hard pull or soft pull on your personal credit profile.

They will either accept or deny your application based on their credit criteria and your score—amongst the other listed factors.  You should refrain from pulling your credit too often, as it can definitely damage your score if done too many times, too soon. Do not pull your credit unless you know you are going to get approved, or you are trying to build your credit profile. That being said, not every pull is bad, and will result in a negative drop on your credit score. In fact, it’s suggested to have between 1-2 pulls every several months to keep an even credit profile.   

 5. Good Mixture  

The final factor used when determine your credit score is having a good mixture of credit. Most lenders want to see at least three revolving lines of credit (these are lines of credit such as store credit cards, which are constantly being debited and credited). They also prefer to see one or two forms of installments, which could take the form of a mortgage loan, auto loan or personal loan. Having an even mixture of credit types lets lenders know that you can handle different forms of credit and are highly creditworthy! 

➤ Need Funding or Building Your Business Credit? Click Here
➤ Need to Boost Your Credit Score? Click Here
➤ Connect with us on Facebook: TyeStyle Credit Solutions LLC
➤ Follow The Credit Lady on Instagram: @TyeStyleCreditLady

*Connect with us on Facebook: TyeStyle Credit Solutions LLC
*Follow The Credit Lady on Instagram: @TyeStyleCreditLady

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