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How is Your Credit Score Calculated?

Your credit score is one of the most important numbers you’ll ever have associated with your name. Most people know that their credit score can impact everything from the interest rates on loans, to being able to get a loan at all and even things like getting a job or their car insurance prices. With this in mind it is essential to know how your credit score is calculated so you can keep it as high as possible. Credit scores typically range from 300 up to 850, and the higher the number the better.
Credit scores are calculated using a variety of different types of information from your credit history. Each of the three major credit agency calculates the score slightly different but they all have quite a bit in common. They look at just about everything from your financial history and use it to calculate the total score. The following are some of the most important things that these agencies look at:

  • Number of Accounts – The number of open accounts you have is important.  These accounts can be anything from credit cards to auto loans or even items in collections.  Having too many accounts will cause your credit score to drop.  Too few might make it difficult for the agency to rate your credit, which will keep it lower.  This is a careful balancing act for most people who are looking to raise their credit score.
  • Types of Accounts – Having too many credit cards is one thing that could lower your credit score.  If you’ve got several accounts in collections this will also cause significant problems.  Most people will have one mortgage, one or two car loans, two or three credit cards and possibly another loan of some sort.
  • Available Credit – This is a confusing number for some, but it is a very important one.  If you have five credit cards with a total credit offered of $1000 each, but you have a $500 balance on each one, your available credit would be $2500.  Maintaining a higher available balance is a positive thing because it shows that you can control you spending.
  • Length of Credit History – The length of your credit history is taken into account as well.  Younger people with a shorter history won’t have as high of a score as those who have been doing it a longer amount of time.
  • Payment History – This is the most important thing to watch for.  If you consistently pay your bills on time your credit score will go up.  This means all types of bills including mortgage, credit cards, electric, gas and garbage.  Any company to which you make a payment can report it to the credit score companies so you want to make sure you always pay everything on time.

There are many other factors which go into the total score, but these are some of the most important. Having a good credit score is important for most people so always make sure to do all you can to live in a financially responsible way.

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