Calculating your credit score

Clients will ask, what can I do to improve my credit score? One of the earliest steps to improving your score is understanding the basics behind how a score is calculated. This isn’t all encompassing but if you know this much you will know what to manage which will in turn improve your score.

Your credit score is weighted using several factors. Paying your bills on time is critical to a good score along with utilization, inquiries, credit mix, credit history and payment history.

Your payment history counts for 35% of your credit score. This is paying your bills on time which avoids penalty charges and fees in real life and shows the credit rating world that you pay your other creditors so you will likely pay them. Creditors rarely want to be the first or only lender to a client. Good payment history gives other creditors confidence in you. This is the largest weight on your score.

We looked at inquiries and how they affect your score in our last blog. Inquiries account for 10% of your score so being cautious and aware of who is accessing your credit report is an easy way to pick up some points.

Varying types of credit are also good. This is weighted the same as inquiries at 10%. Credit mix means having access to and using different types of credit. A car loan is considered a secured loan, when your lending agency reports this to the bureau it is specifically marked as that type of loan. An unsecured loan with a fixed term and payment (loan from a finance company where you pay the same payment each month) is another type of loan and often these loans are unsecured. A revolving line is normally a credit card or line of credit. A mortgage is normally on a property that you are making payments. Have some or all of these helps your score. Varying types of credit is good. Often we facilitate a personal loan for credit score challenged clients, they then use the loan proceeds to get a secured credit card. This is very quick route to boosting a credit score as the mix is a personal loan and a revolving loan. They become the top two line items on a credit bureau and when paid as agreed both make a good impression on history as the personal loan balance comes down each month the hopefully the revolving credit balance is kept low.

Credit history accounts for 15% of your credit score. This is all your information (accounts, balances, history). If your credit history is good it’s a good way to boost your score with little effort similar to managing your inquiries. If your score is less than ideal, especially well in the past, the weighting does not crush you and if you focus on payment history on your current stuff you can still build a good credit score with a less than ideal credit history.

The second largest weighting at 30% of your score is utilization. This is how much you use of the credit that is available to you. If you have a $10,000 limit on your credit card and a balance of $4000 your utilization is considered 40%. If you are erratic or always at your maximums this affects the utilization scoring. Sudden increases in your utilization can hurt your score. Timing is tricky in utilization. You may always pay your credit cards in full but use them to pay for everything so they can have a high balance at times throughout the month. Depending on when your credit card company reports to the credit bureau and when your credit report is pulled your utilization can have a substantial effect on your score. If you are planning to make a major purchase with credit it is good to plan a couple months ahead and keep things as clean as possible on your revolving credit and run low balances if you have the means to manage it. We know zero balances are best but when that isn’t an option we see the best results for client’s scores come with spreading some balance to multiple cards rather than having a high balance on only one.

That is the how your score is calculated and hopefully it is helpful. As always if you have specific questions please ask. We are not the credit bureau but do see reports every day and take great pride in helping people improve their scores.

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