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Crucial Components of Your Credit Score

Jean Dikken
Educational Opportunities: 
Home > Education & Events > October 2017 > Crucial Components of Your Credit Score

Everybody knows that a good credit score (the higher the better) is important when making a big purchase. However, very few people understand exactly how that credit score is calculated.

Credit scores range from 300 to 850, and they are calculated based on your credit report, which is compiled by credit reporting agencies or credit bureaus. Lenders go to the three main credit bureaus — Experian, TransUnion and Equifax — when reviewing and evaluating your credit reports.

Credit agencies gather a lot of information, but five key factors on your credit report are generally used to determine your creditworthiness when you’re applying for a loan. To help you understand and improve your credit score, we’ve put together a short explanation of the five crucial components that comprise your credit score.

1. Payment history (35%)
The largest contributor to your credit score is your payment history. It accounts for 35 percent of your total score. This portion of the score reflects the number of accounts you’ve paid as agreed and the number of accounts that are delinquent or in collections. It also shows the number of past due accounts, how long an account has been past due and how much time has since passed since you made a past due payment. All of these factors contribute to your score. Because payment history accounts for such a large portion of your credit score, it is very important to make payments on time.

2. Amounts owed (30%)
Contributing to 30 percent of your score, the amount you owe on accounts is another large factor. When calculating this element, credit reporting agencies consider the type of accounts with balances, how often you use revolving credit, your installments compared to your original balances and the number of accounts with a zero balance.

3. Length of credit history (15%)
Creditors want to lend money to individuals who have a long history of paying their debts. To calculate this, credit reporting agencies evaluate the amount of time your credit history has been tracked, the length of time since accounts were opened and the amount of time passed since last activity. The longer your good history, the better your score.

4. New credit (10%)
This portion of your score is calculated based on the number of recently opened accounts and the number of recent inquires.

5. Type of credit (10%)
The number and type of credit accounts also contributes to your credit score. Types of accounts typically include credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. A mixture of account types usually generates better scores than reports with only several revolving accounts, typically credit cards.

What doesn’t affect your score?
Just as several things affect your credit score, there are several things that are not factored into your score, including:
  •  Race, color, religion, gender and marital status
  •  Salary, occupation or employment history
  • Receipt of public assistance
  • Interest rate on existing accounts
  • Age
  • Where you reside
What if my credit score differ between the three credit reporting agencies?
Scores may vary slightly between the three different credit reporting agencies because each may have slightly different information about you. That’s why it is important to check your credit report from each agency once a year to make sure they are accurate.

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