Credit Management: How Is My Credit Score Calculated?

Managing your credit begins and ends with knowing your credit score. Your credit score is directly reflective of your credit report, containing the history of everything in relation to your credit past and present. To wrap up March’s Credit Education Month, we’re going to give you a simple run down of how your credit score is calculated so that you’ll have a better chance of managing debt.

How Are Credit Scores Calculated?

Payment History – 35%

Payment history is whether or not you payed the debt on time. This includes all types of credit accounts, late or missed payments, and public records and collection items.

Outstanding Debt- 30%

This is the total amount of debt that is currently owed. For credit cards, this means the total amount owed across all accounts in relation to the total credit limit. When you are nearing the credit limit, this can indicate an over-extension and could be foreshadowing a late payment. Keeping credit card balances well below the limits will always help this part of the score.

Length of Credit History – 15%

This is how long you have held any and all credit accounts. The longer you’ve had the account, the better this area of your credit score will reflect.

Pursuit of New Credit – 10%

Avoid opening many new accounts in a short period of time. Multiple credit requests may be flagged as a risk. This score considers how many new accounts you have, and when you opened your last account.

Types of Credit in Use – 10%

You want to have a healthy mix of credit. This includes installment loans, credit cards, retail accounts, mortgage loans, and charge cards.  You don’t necessarily need one of each,  but it could be important if your report doesn’t have a lot of other information on which to base a score.  Having too many in one area is a sign of a greater risk that you may need help with credit card debt.

Your credit report is used to calculate a score based on these five factors. The most common scoring system is called the FICO score, where the credit score ranges from 300 to 850. Based on this scoring system, the higher the score the lower the risk. If your FICO score is low, you may receive higher interest rates which would lead to a higher monthly payment.  A low score can also affect your ability to get a job or rent an apartment.

It’s important that you understand how to read your credit report, this way you can properly determine which areas need improvement and start developing a plan if your score is low.

If your score’s weakness is in fact too much credit card debt, our certified counselors can help get you started with a budget and managing your finances by calling 800-769-3571 today.