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How are credit scores calculated?

On Behalf of | Mar 19, 2021 | Firm News

Your credit score plays a role in multiple areas of your life. Along with securing loans and credit cards, credit scores are also important when you apply for a new job or rent an apartment. 

Understanding the process for calculating credit scores is the first step to improving yours. According to Kiplinger, the following three factors determine your credit score. 

1. Credit utilization rate

Credit utilization compares the limit on your cards to how much you owe. The less money owed, the better the utilization rate. Creditors prefer credit utilization to be under 30%, but keeping the balance as low as possible will have a positive impact on your score. You can also increase the limit on credit cards to improve the utilization rate, but this is only beneficial if you do not run up new balances. 

2. Credit history

Your oldest account on record and the average age of all accounts determines the length of your credit history. While poor credit can harm you financially, so can a lack of credit history. Keep accounts open, even if you no longer use them. That way they will stay on record to show creditors that you have a lengthy credit history. 

3. Timeliness of payments

Payments made on time each month boost your credit score. Conversely, late or missed payments cause it to decrease. A single late payment should not have a drastic impact, as most creditors do not report late payments until 30 days after the due date. For most credit bureaus, the timeliness of payments is the biggest factor used when calculating a credit score. 

Having a bad score is not the end of the world. By focusing on the above factors, you can boost your score and look forward to an improved financial future.