How is Your Credit Score Calculated?

A credit score is a number that helps lenders, like banks, insurance companies and landlords assess how well you’ve managed your financial obligations. Why is a credit score important? If you’re planning to rent an apartment, get a car loan, or get a mortgage one day, all of these will require a credit score. A higher credit score also allows you to get the best interest rates and even have negotiation power when getting a loan.

Credit scores are calculated based on 5 things and here’s the breakdown:

1. Payment history

Payment history relates to how you go about making payments. For example, how often do you miss? How many days past do you pay? This makes up 35% of your credit score.

2. Amount owed

Amount owed means how much you owe compared to your credit max, making up 30% of your credit score.

3. Length of credit history

Length of credit history means your history of making payments on time, and the longer the history of on time payments, the better. This accounts for 15% of your credit score.

4. Your credit mix

Credit mix represents how many different accounts you have such as home loans or other types of credit cards. This contributes 10%to your credit score.

5. Your new credit

Lastly, new credit means your recent credit history such as to how many new accounts you’ve opened or credit you’ve applied for. This accounts for 10% of your total credit score.

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It’s important to understand the factors that determine your credit score, so you can have a good idea of how to improve your score. It’s a good idea to check your credit score often. Not only can you identify areas of improvement, but you may also catch any errors made by your creditors and dispute them.