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It is almost guaranteed that every finance website will tell you that your credit score is important and that you need to constantly check it, but people often forget about telling you how your credit score is calculated. In this article you will find out everything about it.
The first thing to know is that your credit score is not unique. This means that you will have different credit scores depending on the provider you are looking at. As you can see here, your credit score ranges between 300 and 850, and depending on the provider, the score will mean something different.
How is my credit score calculated?
Well, as you might have seen, the credit score is often referred to as your score. This is not the only type of credit score in the country, but it is certainly the most popular. This is how it is composed:
- 35% Payment history
- 30% Amounts owed
- 15% Credit history
- 10% Credit mix
- 10% New credit
Your payment history shows if you pay on time and consistently. This section will also be composed of previous delinquencies, collections and bankruptcies, as well as how often you miss your payments.
To sum up: every time you pay on time and consistently, your credit score will likely go up, and it will hurt your score every time you miss payments.
This section is composed of the amount you owe compared to your total credit available. Keeping your utilization low is key in this matter. Someone who keeps a high and high utilization will see a drop on his or her credit score. On the other hand, keeping a low balance and utilization will help you improve your credit score.
With your credit history, the lengthier, the better. If you are starting your financial and credit life, you can become an authorized user of someone else’s credit card to help contribute to this section.
Financial institutions will look at the average age of your credit, which is why that solution might work if you are just starting out.
This section shows if you can manage different types of credit, so having a good credit mix will definitely improve your credit score and lenders will look at you as someone trustworthy.
Applying for new products will make your credit score drop slightly. It is recommended to apply for a limited amount of products at any point in time.
As you can see in this article, the score you have can be classified on a different level depending on the provider (FICO or VantageScore). If you want to see how you are doing with your credit score you can go here and get your credit check for free.