Calculating your Credit Score

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July 19, 2019
Calculating your Credit Score

Image Copyright Ted Grussing Photography – Used with permission

It is common knowledge that your credit score has an enormous effect on your purchasing power.  This numerical calculation of your credit history has, until recently, been a closely-guarded secret.  Pursuing a sizable purchase or applying for credit often caused great anxiety because we just didn’t know where we stood with the “credit report”!

The next five weeks we would like to present some aspects you may think you already know about credit scores.  We hope you will travel along with us on this tour and, like us, learn some new ideas.  This first week, let’s examine some factors used in estimating your score.

The major influence is payment history, which reportedly makes up 35% of your FICO score.  Timely payments, length of positive history and severity and quantity of delinquencies are very, very important.  If possible, it is recommended to not only pay your bills on time, but to pay them on time and in full.

Next in importance is your use of credit, making up 30 % of your score.  For example, if your credit card limit is $10,000, the higher your balance, the more it counts against you.  Of course, having too many credit cards with balances will definitely lower your score.

Rod Griffin, Experian’s Director of Consumer Education, has stated “There are two keys to every credit score and having a good score:  You have to pay your bills on time every single time and you have to keep balances as low as possible.”

Other aspects to consider in keeping a good score is keeping your oldest credit accounts open and making sure you’re not constantly applying for new credit lines.  Length of your credit history makes up 15% of your score and number of requests for new credit make up 10%.

Okay – we have accounted for aspects that add up to 90% of our FICO score.  What could be left to consider? The final 10% of your score takes into consideration the types of credit in use, in other words, do you have a healthy mix of credit accounts or on overload of one type of credit, like credit cards?

At the present time, FICO credit scores range from 300 to 850, with the national average at 704.  Any score between 700 and 749 is typically labeled “good”: and scores 650 to 700 “fair”.  It seems that Americans are learning what they need to do to improve their financial history and how to carry it forward.  In the future, we will discuss how to keep those money scores in your favor.

Have a great week!