What is a Credit Score and How is it Calculated?

A credit score is a number between 300 – 850. It provides users with an idea of what your credit worthiness is; how likely are you to pay your bills on time. Your score is generated using your credit history that appears on your credit report. The following ranges are considered when rating a credit score.

Credit Score Rating Scale

300-579 Very Poor

580-699 Fair

670-739 Good

740-799 Very Good                                                              

800-850 Exceptional

The following are the main factors that make up your credit score:

5 Categories That Make Up a Credit Score

1.       Payment History 35%

2.       Debt Level 30%

3.       Length of Credit History 15%

4.       Inquiries 10%

5.       Mix of Credit 10%

See their descriptions below:  

1.       Payment History

Your payment history makes up 35% of your credit score. This is THEE most important item impacting your score. Paying your bills on time with zero error will ensure that you have a perfect rating in this area. The credit bureaus monitor the severity, the frequency, and recency of missed payment. Consistency and on time credit payments will make or break your score.

2.       Debt Level

Your debt level, also know as your utilization level, makes up 30% of your credit score. The credit bureaus want to see that you are responsible enough not to max out your credit cards. Keeping a balance below 30% is optimal for credit building. Do this by paying down your credit card balances down to the 30% each month before the card reports to the bureaus or only spend up to the 30% in a given month.

3.       Length of Credit History

The length of time each account on your credit report and the length of time since the last transaction makes up 15% of your score. A person that is new to having credit will not be able to have a perfect credit score, even if they have perfect payment history and debt level. It takes time for the credit bureaus to fully evaluate your credit worthiness and with time comes a perfect credit score. While perfection is in the distant future, having an excellent score is still obtainable without a long credit history if you have no missed payments and a low utilization.

4.       Credit Inquiries

While it only accounts for 10% of your score, the credit bureaus monitor the amount of new credit you apply for. A consumer who applies for too many credit sources at once is in financial trouble, therefore a riskier candidate for credit. Opening a new account will also lower your average account age. You must be sure to open accounts only when needed and only when the likelihood of gaining an approval is high.

5.       Credit Mix

The final category is the Credit Mix makes up 10% of your credit report. The credit bureaus want to see that you can repay a variety of debts, not just one kind. To achieve a perfect credit score you must have a credit card and other installment loans. A person without a credit card looks to be a greater risk for credit repayment than someone with a credit card who is managing it responsibly.