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How is Your Credit Score Calculated?

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Authored by Lori Godin in Credit Card
Published on 12-09-2008

A credit score is an essential part of obtaining low interest rates on credit cards, mortgages and even vehicle loans. Did you know that your credit score can even dictate the rates that you receive on your car insurance? For something that has such an impact on our daily activities, not many people know how the score is calculated. Each portion of the credit score is broken down into sections such as payment history and the length of credit terms. Use the following to learn how your credit score has been calculated:

The way that you pay your bills accounts for thirty-five percent of the credit score. Recent activity, delinquent payments and late payments could mean a decrease in the powerful score. Did you know that paying your bills on time each month and creating an adequate recent payment history can help to increase your credit score? Paying bills late, defaulting on accounts and having accounts sent to collections will all cause negative connotations in this area.

Thirty percent of your credit score is obtained using your credit information – more specifically, how much room is available on your credit cards. The closer you are to the limits, the lower your score in this area. With balances close to the limits, it increases the risks to lenders, meaning that you are not going to get approved for as much credit as you would if your credit card were not carrying a high balance.

How long have you been using credit? Fifteen percent of your score is based on the history that you have established in the length of time that you have been using credit. Maintaining credit with the same accounts in the same companies fares well on the credit score.

Ten percent is determined through the variety in which you have obtained credit. For example, credit cards, loans and a mortgage will yield a higher score than solely having credit cards alone.

How much new credit have you opened? Experts recommend avoiding opening multiple accounts in short periods of time to keep this portion of the credit score high. Opening too many accounts, and even filling in too many applications mean that you could be affecting your credit score. Hard inquiries are those which companies and businesses are making into your credit report, the ones which affect your rating. Soft inquiries are created when the debtor requests a copy of their credit score, for personal use.

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