• Kai Dumont - Top Shelf Credit

How Is Your Credit Score Calculated ?

Credit Scores are very in depth. Mathematical algorithms are used to come up with answers for not only calculating the credit score, but also determining what type of buyer you will be, whether or not you are a safe option to receive a loan, can you basically be trusted to repay money that once belonged to someone else. In most cases, the answer is yes to some degree or another. So, most will take out a loan and repay it at some point in their life.

From that point, it is all about how you pay that loan back and whether you choose to pay it back at all. Hopefully, you choose to pay the loan off correctly and your credit score will either stay up where it is or go up depending on the type of score held before the loan. Regardless of which way you decide to go in regards to making payments, the credit score mathematics involved which determine the way your score moves is based on these five things and their percentages:

1.Payment History (35%):

•As you can see, how payments are made is the largest factor calculated into determining a credit score. That is why it is so important to make payments on time or ahead of schedule by a few days to a week or two or more if possible. If you can make payments in full before the interest rates are applied you will not only build the credit score but also save some money in the process.

2.Money Owed (30%):

•This category can be a bit of a catch 22 sometimes. The way this one works is dependant upon how much of a limit you have per card and overall in relation to how much money is spent and left on each card and in total each month. It can be a bit confusing.

So, if you are leaving balances each time you pay, but spending more and more money on said cards each month you will eventually hit a threshold where you have too much money unpaid.

3.Age of Credit History (15%):

•This category is pretty simple. Let’s say you have had all of your credit cards for the same amount of time; you have had each of them for a total of 3 months. This will mean that you are a new borrower and the score will represent that. If the opposite is true, you will be an established borrower and the score will be much higher as a result.

4.New Credit (10%):

•This is another relatively easy one to comprehend. Let’s say you have had one credit card for a year or two, and it was the only card you have ever owned. Well, then, all of a sudden you decide to apply for and receive five new cards at the same exact time. Companies are going to look at that as a bit of an unusual movement and consider said customer a bit of a credit risk. New Credit can also mean exactly what it states, that you are a completely new credit owner.

5.Variety of Credit (10%):

•This category is about what types of different credit you have. If you a couple of credit cards, a car loan, mortgage, and a personal loan you will be considered to have a variety of credit which normally means your score will be rewarded for such. Creditors look at it as if three other places loaned you money and your score is good and you have never had any issues, that new bank will be more inclined to loan credit as well.

That is pretty much how credit scores are calculated. It is a mixture of different factors all balled up into one set of numbers. Three numbers to be exact from the high end of 850 to the bottom dwelling 300. Read and research how credit works before starting any credit of your own or before getting in too deep. Even if you have a bad score now, there is always hope and many things to do in order to start building the score back up.

#credit #finance #personalfinance

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