You probably haven’t given much thought to how your credit score is calculated. Why would you? Until you need to apply for a loan that required a credit check, it won’t affect your lifestyle at all.
But if you expect to need a loan in the near future, understanding how your credit score is calculated will allow you take steps to improve it so that you have a better chance of being approved for that loan.
There are 5 things that make up your credit score. They are:
- Payment history
- Credit utilization ratio
- Length of credit history
- New credit accounts
- Credit mix
Let’s take a look at each one of these to see which factors are important to focus on.
Payment history (35%)
Your payment history reflects on how responsible a borrower you are. It looks at your tendency to pay bills on time as well as any credit events such as bankruptcy.
Level of debt (30%)
Your level of debt ratio is the percentage of available credit you’re currently using as compared to your total available credit. The lower this percentage is, the higher your credit score will be.
Age of credit (15%)
Credit card companies want to see consistently in your handling of credit over time. The longer your credit history, the higher your score for this portion of the evaluation.
Credit inquiries (10%)
Opening too many new accounts in a short period of time is a red flag for lenders. It suggests that you’re depending on more and more borrowing to pay your bills. If you’re planning on opening several new credit accounts, do it over a period of time.
Types of credit (10%)
Credit bureaus treat credit card accounts differently that other forms of credit such as mortgages, student loans, car loans.
Based on the percentages shown above, it makes sense to focus on payment history and your credit utilization ratio as they make up 65% of how your credit score is calculated.