What is the Credit Score and how is it Calculated

Most people are aware of the fact that they have a credit score, but few are aware of what there particular score is and of those who happen to know the number, few know how that figure is reached.

In layman’s terms, your credit score is the watermark by which potential lenders judge whether or not you are a good candidate to extend credit too.  It gives them an insight into your financial workings to tell them the likelihood of you being able to pay against the credit extended.

Your credit score is a number between 300 (the lowest) and 850 (the top possible score) and is calculated based on a number of criteria.  The higher your credit score is, the more appealing a candidate you are to prospective lenders.  A high credit score will often land you the best terms on a loan and the best interest rates on credit cards.

Your credit score can be one of the most important numbers in you adult life, so it’s important to know how the figure is calculated so you can do your best to stay toward the higher end of the scale.

The most important factor in determining your individual credit score is your history of payment.  If you are diligent about paying your bills on time, absolutely every month than you shouldn’t have any worries about this part of the equation.  Conversely, if you miss payments or are regularly late with your payments, that is a sure fire way to less than perfect credit.  This one factor counts for more than a third of your credit score.

The second biggest factor that goes into figuring you credit score has to do with the actual amount of money that you owe to your lenders.  If you are at, or very close to your credit limit on a number of credit cards with very little credit available than your score will be negatively affected, but if you are in good standing with plenty of credit available there should be no negative affect on your score.

The third largest determining factor, which when combined with the two aforementioned pieces will account for more than three-quarters of your overall score, is your history of credit. Creditors want to see that you’ve successfully managed to keep a good track record of payments over an extended period of time.  Long term memberships with one credit card, personal loans that have been successfully paid off or auto loans that have been successfully been paid off are things that will positively contribute to your score here.  Unfortunately this is the one area of your credit score that only consistency over time can help.

Opening or applying for new lines of credit or loans is another factor that goes into determining your credit score.  Constant inquiries from prospective lenders can make it seem as though someone is considering doing a lot of spending all at once and that can work to pull down your score a bit.

The last factor that goes into determining your credit score is the type of credit you have had.  The best way to have this portion of your score high is to have experience paying on a variety of loans – car, personal, auto and home loans are installment loans where you pay a certain amount every month until the debt is paid off; lines of credit and credit cards are open-ended so you could conceivably be paying a different amount every month forever depending on your purchasing activities.  Showing that you are capable of handling both types of debt will aid your credit score.

Each of these factors weigh differently in terms of your total score, but being conscientious with each of the above mentioned factors will ensure that you maintain a high credit score, making you eligible for the best possible lines of credit in the future.