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Part 4:

How is My Credit Score Calculated?

Part 4
How is My Credit Score Calculated?

There are 5 key factors that go into calculating your credit score.  Each of these factors is weighted slightly differently, but it’s impossible to have a stellar credit score without keeping an eye on each of these financial areas.  In this section, we’ll break down what each of these factors mean for you as the consumer, and begin to deconstruct some strategies for getting on top of and improving these sectors of your credit report.



Payment History

Your payment history is the single most important, and potentially easiest to control, factor affecting your credit score.  If lenders can see that you’ve made consistent, on-time payments to your past or existing debt, this lets them know that you’re a reliable consumer even if your total debt is on the higher side.  


Payments made to credit card balances or loans can affect your credit score both positively and negatively.  If you are past due on a payment it will hurt your credit score, but you will also receive a little gold star for every on-time payment you make to these accounts.  


Medical bills, rent, utilities, and child support payments are common examples of accounts that will report to the bureaus if you miss a payment, but won’t give you kudos for any on-time payments.  They will either contribute negative information to your credit report or none at all.


When a payment is past due, you generally have 30 days to catch up before the lender will report you to the credit bureaus.  If you pay the minimum due before the 30 days is up, this late payment won’t affect your credit score in any way.  But if you allow a payment to go unpaid for longer than 30 days, the lender WILL report you, and this missed payment will stay on your credit report for up to 7 years.  Once a late payment has been reported, it will have a worse impact on your score the longer you allow it to go unpaid.


Amount Owed

There are two different factors that go into play here: your total amount of debt across all accounts and your percent of utilization on your credit card(s).  Your total debt is pretty self-explanatory, this is just looking at how much debt you have with the ultimate goal being to have as little as possible.  Your percent of utilization may need a bit more explanation.


On every credit card, you will have a credit limit – this limit is typically determined by your credit score and history.  A credit limit is the maximum balance that you can have on a card at any given time.  Your percent of utilization is the balance you carry on a card in comparison to the credit limit on the card.  


The general recommendation is to keep this balance around 20%.  This shows that you are using your credit line yet you are not coming anywhere close to your limit.  You can still pay off your statement balance every month, and therefore avoid collecting interest, because your spending is reported to the credit bureaus after each statement is sent out.


Length of Credit History

One key thing to note is how important it is to keep your credit card accounts open, even if you have no intention of using the card any longer.  As long as an account is open, it will contribute to your length of credit history, and positive information will never leave your credit report.  Other than that, there’s not much you can do to improve this factor except wait.  


Types of Credit

Now, obviously you shouldn’t be taking out an array of loans just to improve your credit score, but having a diverse credit report will boost your score a bit.  Credit cards have the highest return on investment when it comes to improving your credit score, but this is only if you manage it responsibly.


Hard Inquiries

Every time you open a new line of credit, or give a lender permission to access your credit report (like when applying for a new credit card), your credit score will be docked a couple points.  This applies much more to credit cards than any other type of credit, so you should avoid applying for multiple cards before any big loan decision like a mortgage or auto loan.  FICO generally just looks at inquiries from the last 12 months, and even then this doesn’t play a large enough role in your overall credit score that you need to stress about it.


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