What’s in a Credit Score
A credit card score is actually a number between 300 and 900 that is calculated much like a grade in school. Like a report card, this grade can have a big impact on your life. Just as a child with poor grades may find themselves facing a punishment, missing out on opportunities for advanced classes or scholarships, or even being held back, you too can face similar consequences if you receive a low credit score. It can certainly feel like you are being punished when you are denied the interest rate you were counting on, and you may miss out on opportunities for special credit card offers, loans, or even certain jobs based on your credit score. It will certainly feel like you are being held back if you find yourself with a bad credit score.
The information in your credit report is used to determine your actual credit score.
There are variations of the formula for exactly how the score is calculated used by different Credit Reporting Agencies, and these scores are usually averaged to get your final credit score. Here is a general overview of how your personal credit score is determined.
Approximately 35% of your score is based on your payment history. This portion of your score is affected by how many bills have been paid late and how often, if any bills were actually sent out for collection, if you have had any bankruptcies, and other information related to how you do or do not pay your bills. The more recently you have had any negative events in your payment history, the worse the impact will be for your overall score.
Approximately 30 % of your score is based on your total debt to credit ratio. This includes the total amount that you owe on all car or home loans plus outstanding credit card balances in comparison to the total amount of credit that you are qualified for. The things that can impact this score are how many credit cards you have and how close they are to their credit limits. The more cards you have at their limits, the lower your score will be. The rule of thumb is to keep your card balances at 25% or less of their limits. It also helps if any other loans have been paid down from the original amount owed.
Approximately 15 % of your score is based on the length of time you have had credit. The longer you have had your credit established, the better it will be for your overall credit score. The more information available about your past credit payment history, the more accurate the prediction of your future payments can be.
Approximately 10 % of your score is based on the number of inquiries that have been made on your report. If you apply for a lot of credit cards or loans, you will have a lot of inquiries listed on your credit report. These lower your score because they indicate that you may be in financial trouble or may be taking on a lot of debt, even if you haven’t actually used the cards or taken out the loans. Again the more recent these actions are, the worse they will affect your credit score. Luckily, most scores only count inquiries made during the last year.
Approximately 10 % of your score is based on the kinds of credit that you currently have. The number of different loans and available credit from credit cards you have makes a difference. There is no magic number or combination of types of accounts that you should or should not have. These are actually only really an important factor if there is not much other information on your credit report to base the score on
Each category is evaluated and then this information is compared to the credit performance of other consumers who have similar credit histories and personal profiles. Eventually, from all of those factors, your credit score is actually determined.