Taking the mystery out of credit scores

Perhaps the greatest mystery for many individuals is how their credit score is calculated. This three-digit number wields great power over one’s finances, but for many, the details behind that number remain shrouded in mystery.

Understanding your credit score begins by realizing a few things about the scores: 

  • Credit scores vary within the three major credit bureaus — Equifax, TransUnion and Experian. Each credit bureau may also use several different scoring models based on types of credit, such as unsecured or secured.
  • Your current employer, employment history and income do not influence your credit score. Age, gender, marital status and place of residence also play no part in your score. 

So what exactly does generate that mysterious number? A FICO score, one of the most commonly used credit-scoring systems, includes numerous categories, such as:

  • Payment history which makes up 35 percent of the score.
  • Amounts owed make up 30 percent of the score, but that does not mean having a lot of debt will necessarily lower your score. What can lower your score is maintaining a balance near your credit limit. (For example, having a credit card with a $15,000 limit will not bring down your score, but having a balance near that limit will start to affect your score. This is the same with lower-limit cards. If your limit is $500 and your balance on that card is $450, your score may be negatively affected.)
  • Length-of-credit history bearing 15 percent of the weight.
  • The final 20 percent is divided between the types of credit used and new credit.

Since so many factors play roles in determining your credit score, it can be difficult to say precisely how one change in your credit report will affect your number. However, since the greatest percentage of your score is based on payment history, the best way to help your score is by simply paying your loans on time, over time, all the time.

Don’t be afraid of your credit score. Removing the mystery around the number is a great step in learning and improving it.

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