How are credit scores calculated?

 Posted on December 04, 2019 in General Bankruptcy Topics

A great credit score can get you great interest rates on loans, help you secure employment, and even make the dream of owning a home a reality. There are a lot of different factors looked at when calculating a credit score, each of which gives an indication of your financial soundness.

Payment history

Your bill pay history has the most significant impact on your credit score. Late and missed payments typically bring your score, with more recent payment issues having a greater impact than late and missed payments in the past. A poor bill pay history makes up about 35% of your total credit score.

Amount of debt

Credit utilization is the amount of debt you currently have vs. how much your credit balances are. A high debt-to-balance ratio causes lenders to question your ability to pay back loans. For a good credit utilization score, your credit card balance should make up about 30% of your credit limit.

Length of credit history

While late payments and credit utilization play a role, how long you've had credit can also be an issue. Keep in mind that a short credit history or no history of credit can also be a red flag to lenders. While this doesn't indicate financial irresponsibility, it does show inexperience with credit. To extend the length of your credit history, don't close out credit cards, even if they've been paid off.

Inquiries

When you apply for a loan or credit card, an inquiry will be performed. When there are too many inquiries performed, it may create a poor impression of your current financial status. It can also show poor spending behavior, which is likely to cause debt to accrue if it hasn't already.