How to Calculate Your Credit Score
Your credit score is a critical piece to your personal financial puzzle. It helps determine your creditworthiness and what terms you qualify for on new credit and loans.
Your 3-digit credit score ranges from a low of 300 to a high of 850. The higher your score, the more likely lenders will offer you their most favorable terms such as lower interest rates and higher spending limits.
What Factors Affect Your Credit Score?
But what goes into getting — and maintaining — a high credit score? Although credit agencies don’t share specifics of how scores are calculated, they are open about the five most common factors that account for varying percentages of your score. By paying attention to these areas, you will have a better understanding of how your score is determined.
The five factors — and the percentages of your score they represent — are:
- Payment History (35%): Payment history is the most important factor in determining your credit score. Even one missed payment can have a negative effect on your score. When considering you for new credit, lenders want to know whether you will pay back your debt on time. That’s why payment history is such a critical factor, accounting for 35% of your total score.
- Amounts Owed (30%): Also known as credit utilization, this factor looks at how much of your available credit you’re using. It is the second-most important component when calculating your credit score, accounting for 30% of it. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. For instance, if you have one credit card with a $3,000 limit and a balance of $1,000, the credit utilization ratio of 33.3%. Credit utilization looks at how much of your available credit you’re using and provides potential lenders a snapshot of how reliant you are on credit. Generally, you want to keep your utilization under 30%.
- Credit History (15%): This portion looks at how long you’ve been using credit and how long your credit accounts have been established. It factors in the ages of your oldest credit account, your newest account and the average age of all your accounts. Credit history makes up 15% of your credit score. Generally, the longer your credit history, the higher your credit scores.
- New Credit (10%): This factor examines the number of credit accounts you’ve recently opened, as well as the number of hard inquiries (also called “hard pulls”) lenders make when you apply for credit. Opening too many new credit accounts in a short period of time can have a negative effect on your score because it may indicate you’re in financial trouble. New credit accounts for 10% of your total score.
- Credit Mix (10%): Variety is the spice of life and contributes to a high credit score, too. The diversity of your credit account portfolio — credit cards, mortgage, auto loans, etc. — plays a factor when calculating your score. It is an indication of how well you manage an array of credit products. Credit mix accounts for 10% of your score.
The Most Important Factors You Can Control
Although all five of the above factors contribute to your credit score calculation, the most important things you can do to maintain a strong credit score are to make your payments on time every month and not use too much of your available credit.
In total, these two areas account for 65% of your credit score. Even one missed payment can have a negative impact on your score. Additionally, high credit utilization often is a red flag. Even though you may have high spending limits, it’s best to not max out your cards on a regular basis. Of course, if you do use more than 30% of your available credit, be sure to pay it off quickly.
Need help building credit and paying off debt? Start with a free and confidential credit counseling session. We will review your income, expenses and debts to determine the best course of action.