If you have any kind of a financial history, then you have probably heard the term “credit score” thrown around from time to time. Yet, ask a handful of people what it is, and how they come up with the number, and you will get a handful of answers. That’s really no big surprise, as the majority of people find their credit score to be somewhat mysterious.
To be fair, the companies that calculate the scores do not share their exact formulas, but that doesn’t mean it has to remain a mystery. It’s certainly a good idea to have a solid grasp of what goes into calculating your credit score breakdown, as it will help you take the right steps to get and keep your number higher.
Think of it this way: You need to have some idea of how your credit score is derived, otherwise you can’t know for sure how the steps you take will affect it. Just like any subject in school, you can only get good results if you know what subject you’re taking and what will be on the test. Not knowing is a sure ticket to financial ruin.
With that in mind, let’s take a look at some things that go into determining your credit score (all percentages are approximate):
* Credit mix accounts for 10%. This refers to having different types of loans and repaying them as agreed. Having credit cards, a car note and a mortgage indicate that you are able to manage more than one kind of loan at a time.
- New line of credit inquiries account for 10%. When you try to open up several accounts in a short period of time it raises the concern that you are overextending your credit. The more inquiries, the more negative the impact on your score. Note: Any inquiries you make on your own credit reports do not count.
- How long you’ve had a credit history accounts for 15%. Those who have only recently received credit for the first time will have a lower score. However, don’t think that having credit for twenty years will make up for missing payments, as this is only a portion of how the credit score breakdown.
- The total amount you owe accounts for 30%. This is usually calculated by comparing your debt to your income. The goal is to owe less than 25% of your annual income. The bigger your debt-to-income ratio, the lower your score.
- Payment history accounts for 35% (more than any other category). If you are diligent about paying on time, and have never missed a payment, then the above categories won’t matter as much. But even one missed or late payment can drastically reduce your credit score.
As you can see with this credit score breakdown, it’s really not all that mysterious. It’s really as simple as not borrowing too much, not opening a bunch of new accounts, having a good blend of credit, and paying on time…every time.