September 23, 2019 Last updated January 6th, 2021 1,466 Reads share

What Goes Into Calculating Your Credit Scores

Calculating Your Credit ScoresImage Credit: Deposit Photos

Your credit score is an important indicator of your financial health but it can be confusing. There are six primary factors that the credit reporting agencies use to assess your credit viability. Read on to learn what they are and how you can work on each to improve your score.

Hard Inquiries

Every time your credit score is checked that’s known as an inquiry, but it’s not as simple as checking the number of times any agency has checked your score. If that was the case then tracking tools that give you daily or weekly updates on your credit would wreak havoc on your credit score. Instead, inquiries are classified as either hard or soft inquiries. Generally a hard inquiry is one performed by a potential creditor while assessing your creditworthiness, however, there can be some surprising inquiries which also record as hard inquiries, such as a credit check from potential landlord or when applying for a utility or service which performs a credit check.

Make it work for you: Too many hard inquiries on your account will harm your credit slightly, and checks can remain on your account for up to two years. The best way to avoid inquiry troubles is to not go overboard with applying for credit. Instead of a broad approach to acquiring credit, instead perform an honest assessment of your credit situation and target a creditor likely to approve you so that you are not having to request another check from a different lender when you get declined.

Total Accounts

While the number of hard inquiries in a short period of time is a hazard to your score, it’s still important to gradually open more accounts in order to not be lowered for having too few credit accounts on your report. An ideal score for total accounts comes as you enter double digits, as the more accounts there are on your record the greater the reporting agency’s ability to get an accurate assessment of your credit use habits.

Make it work for you: The most important factor in getting enough accounts without over-inquiring is to not close out credit cards when you are done with them. You are not required to continue using the credit cards, however, so you are still free to simply pay a card off then destroy the card and not put any more money into it. By simply opting not to formally close the card you will get credit for having an account.

Credit Age

Just as it’s important to have enough accounts on your credit report for agencies to feel your numbers can be used to safely assess you as an optimal lender, so too is it necessary to have a long credit history. Even if all of your other metrics are strong if your credit history length is just a year or two it can limit how high your score can go as there is not a long enough track record to justify a high score.

Make it work for you: If you don’t have any previous history it’s important to begin establishing some as soon as possible, so consider a small secured credit card so that you can begin your credit history and start yourself on the path to having an adequate credit age as soon as possible.

Derogatory Marks

One of the most harmful elements which can appear on your credit report is a derogatory mark. A derogatory mark occurs when you go through a process that demonstrates a risk for a lender. This can include bankruptcy, foreclosure, collections or default on a loan, to cite the most common occurrences. It only takes one derogatory mark to create a large flag, and multiple will cause significant damage to your credit score.

Make it work for you: You should always seek to avoid derogatory marks unless there is no other option. If you have already had one or more, while you can’t undo them you are able to change how your credit is managed going forward. Even the worst marks will eventually fall off your report, commonly in seven years, so the further you get from the date they occurred the closer you are to your fresh start.

Credit Utilization

If you have credit cards where you are at or near your limit there is a good chance it is hurting your credit score. Your overall credit usage percentage is a major factor in your score, and any use above 30-percent is harmful. The calculation is made on your total credit line, so you can have one card near max provided you have other cards with low enough balances to keep your total usage in check.

Make it work for you: When in doubt, it’s commonly the best option for extra money to pay down debts in a given month to go toward lowering your credit card utilization until it is at an acceptable level. Make your minimums on all reporting loans, then spend excess money in your debt budget on paying down cards. It is also helpful to keep cards active even after you zero them out and don’t wish to use them so that they count as an unused available credit.

Payment History

The final major indicator which affects your credit score is a consistent history of making all of your payments on time. Your score can fall quickly if you miss even just a few payments, so it’s vitally important to always make at least your minimum payment to all creditors every month. And yes! You can pay a credit card with another credit card.

Make it work for you: As with derogatory marks, while you can not undo errors in the past, by establishing a successful payment pattern going forward you can begin the process of allowing your payment errors to fall off your report.

Credit Score – Deposit Photos

Sergey Petrov

Sergey Petrov

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