One of the biggest challenges with personal credit is understanding the ins and outs of how credit is calculated, the breakdown of credit scores and how they are impacted.
Some consumers believe credit scores are calculated based on the number of credit cards or tradelines you have. Others think if you have no credit cards, you have excellent credit. And still many consumers believe a credit score is automatically tied to things like your rent or even a debit card. But nope! Let me explain...
Credit Scores Are Based on Five Key Factors
35% is payment history. This is the largest calculation of the score and has a lot of impact on your overall credit score.
30% is capacity (or amount used). The more you use the lower your credit score.
15% is age of account. That means how long you've had the account or what is your oldest tradeline
10% is new credit. The number of new tradelines reporting to your credit profile.
10% is inquiries. The number of times credit has been requested.
For an optimal credit score, keep credit utilization between 6% - 10%.
Here’s how your score adds up...
Credit Scores Range From 300 - 850 (poor to excellent, respectively)
300 points is the beginners score - let's just call this the base score you're born with that leaves us with 550 points to build to an excellent 850 score.
Now let's do the breakdown
550 x 35% payment history = 192.50 pts
550 x 30% utilization = 165.00 pts
550 x 15% age of accounts = 82.50 pts
550 x 10% new accounts = 55.00 pts
550 x 10% inquiries = 55.00 pts
The total number of points here is 550 points + the 300 points you're given out the gate = An excellent credit score of 850
Does it always work this way, unfortunately no. Many of us have hiccups along the way and those points can drop lightening fast.
Check out my next blog post where I cover how many points we lose along the way just by using our credit.
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