How is Your Credit Score Calculated?
What’s your credit score? If you don’t know the answer, right now is a great time to find out because this one number can have an important impact on your financial life.
What Is a Credit Score?
Your credit score is a rating of your creditworthiness, or basically how risky it is to lend you money, and is based on your credit activity. The FICO score—the one most often used—ranges from 300 to 850, and the higher the number the better.
How is the Score Calculated?
Credit reports with your score are created by three credit bureaus—Equifax, Experian, and TransUnion. Your score is calculated based on several factors:
35% Your payment history, including late payments or delinquencies
30% How much you owe
15% How long you’ve had accounts for
10% The type of credit used, such as mortgage, car loan, credit card, etc.
10% The amount of new credit you have
How Do You Get an Ideal Score?
We’re all hoping for a top credit score so we can qualify for loans when needed and can pay the lowest interest rate possible. Here’s an ideal combination of credit activities:
- 3 – 4 revolving credit cards, each with high lines of credit ($10,000 or more) with a low balance carried on one (note that you can – and SHOULD – pay this balance off each month, so even if you just use it once a month, it will suffice for this purpose).
- All types of credit on your report are at least 6 months old, with at least one that is 3 years old or more.
- NO delinquent items on your report.
- 1 – 3 or fewer hard inquiries over the past 6 months.
- All loans are in good standing (car, mortgage, student loans, etc.).
Where Can You Get Your Credit Score?
Adults should know their own credit score, since it will impact the ability to get credit when needed, as well as the interest rate paid. Many companies now provide periodic free credit score updates, including some credit card companies, free financial management software such as Mint, and others. You can also purchase your score when requesting your free credit report. Note that your credit report differs from your credit score and your credit report doesn’t include your score.
Member FDIC. Member DIF.