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  • May

How are Credit Scores Calculated?

There are 5 factors that go into calculating a credit score. Learn what each of them are and how you can improve your score within 30 days.

how to calculate credit score

A good credit score opens up more opportunities for loans and credit cards with more favorable terms (which usually means a lower interest rate at the very least). But what exactly makes up a credit score?


The Components of a Credit Score


The 5 main factors that go into a credit score calculation are:


Payment History (35%)
Total Amount Owed (30%)
Length of Credit History (15%)
New Credit (10%)
Types of Credit (10%)

Payment History

Payment History typically makes up the biggest chunk of your credit score (35% of your total credit score). This tells the credit bureau what your past track record of paying off your debts are. The longer your track record is of making payments on time, the better your credit score will be. Usually, it takes about 6 months of on-time payments to improve your score, so this is very much a long term fix. Again, it's all about creating a pattern, just making on-time payments once won't show that you're able to consistently do it.


Total Amount Owed

This is also usually looked at as a % of the total credit available to you, otherwise known as the credit utilization ratio. This is the next biggest factor in your credit score - making up roughly 30% of your total credit score.


The credit bureau likes to see a low credit utilization ratio, which means that you are not using all of the credit available to you. This signals that you're very likely to pay back what you owe since you're not maxing out.


Length of Credit History

The length of your credit history plays a somewhat important role in your credit score - making up 15% of the calculation. Essentially, the longer the credit history is, the better. That is also why you might hear people say to never close a credit card since you lose all of that history once it's closed.


New Credit

New credit makes up about 10% of your credit score and it looks at how many new accounts a person has. Having new credit isn't necessarily bad, but each time you apply for new credit, you will most likely receive a hard inquiry. It's basically when the lender asks to receive your current credit report to make sure there are no red flags.


If you have too many hard inquiries in a short amount of time, it's a red flag to credit bureaus as people with a higher number of hard inquiries are 8x more likely to declare bankruptcy.


Types of Credit

Finally, the last factor is the types of credit. This also makes up about 10% of your credit score. This pretty much looks at the two different types of credit that you have: installment credit (car loan, mortgage, etc) vs revolving credit (credit cards, etc).


It's not bad if you only have one type of credit, but having both looks better because your credit is diversified.


Tips on How to Improve Your Credit Score in 30 Days


Tip #1 Bring your credit utilization ratio below 30%

The credit utilization ratio is how much your current balance divided by your total available credit. The optimal ratio is less than 30%. If you're above 30%, pay off the difference by your next credit statement. This will have a significant impact on your credit score!


Tip #2 Ask for a credit limit increase

Instead of waiting for an increase, ask your credit card company for one. You can either call them or request an increase online. If you have a track record of making payments on time and you haven't received an increase for the past six months, you most likely will be granted one. Once your credit limit increases, this will lower your credit utilization ratio immediately!


Tip #3 Dispute any credit score errors.

This is absolutely critical, especially if the credit bureau is saying that you missed a payment. Make sure to check your credit score each time it is published and review for any errors. If you notice something looks off, dispute it immediately. Depending on what is being disputed, it can have a big impact on your credit score.


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