Learn what exactly goes into calculating your credit score.
Curious how your credit score is calculated? How those simple three digit number affect your ability to get a loan?
The credit scoring system became important during the 1980's as a way for lenders to quickly evaluate a borrower's ability to manage credit. Credit scoring is now used by lenders to evaluate your worthiness.
How is credit calculated? It's a great question, and can be confusing, but with some simple guidance, it all makes sense.
Payment History
Payment history is an important factor in influencing your credit score. A lender will be happier with lending you money if you are able to make your payments on time.
Outstanding Debt
Outstanding debt is the amount that you owe to the creditor or lender. Reducing your outstanding debt is always a good indicator of good credit health.
Credit Utilization
Your credit utilization measures the amount of available credit you have compared to the amount you actually use. A good rule of thumb is to keep your credit utilization at 30% or lower across all revolving credit accounts. For a good boost, it would be helpful to get your credit utilization down to 10% or lower.
Try to keep your credits cards to 30% utilization or lower. Maxed out credit cards are a credit score no no.
Credit History
Your credit history takes into account the amount of time you have established credit. Lenders want to see that you have a long history of managing credit, especially managing credit wisely. It is good to never close credit accounts unless absolutely necessary. It is ok to keep the accounts at a $0 balance if you are not using them. This is better than closing the account.
Credit Inquiries
Credit inquiries are defined as each time a creditor or lender makes an official inquiry of your credit. This can be from a car dealer, a credit card company, or a home loan lender. It is important to apply for credit in moderation. Each time an inquiry is made, it stay on your credit report for a period of time. Inquires can drop your credit score, but they will remove themselves on their own.