How Your Credit Score is Calculated

Many people are always worried about their credit scores when applying or cancelling credit cards. A lot of people are concerned about their credit scores decreasing, but there are also factors that increase your credit scores. Credit scores are calculated on a maximum score of 850. Ideally you want to stay above 700/850. Here is a breakdown on how credit scores are calculated:

Credit Scoring

Payment history (35%)

Paying your bills on time is the most important factor in your credit score. Bills include: car loan, cell phone on contract, credit cards, line of credit, personal loan, student loan and any other regular debts. Mortgage payments are actually not reflected on the credit report. Late payments will hurt your credit score, while paying on time will help increase your credit score.

Amounts owed (30%)

Add up all your available credit in proportion to how much you owe. For example, if you have $10,000 in available credit, you want to stay between 0.1% – 10% usage to be ideal and your score will actually go up, which means you want to stay under $1,000 on your closing balances. Under 30% is also fair. The % of usage tells lenders the amount of risk you are. Once you reach the 75% mark, it will start hurting your credit score. If you do not have a lot of credit limit, then try to pay your bills ahead of time, even before the statement closing date, so that your closing balance won’t be so high.

Contrary to popular belief, increasing your credit limit will help your score. A lot of people worry about increasing credit limits, especially in case someone steals the credit card. Remember, if your credit card is stolen, report it as stolen immediately so that it deactivates the credit card and you will be reimbursed for fraudulent purchases within the last 30 days.

Length of credit history (15%)

This factor is based on when the account was opened and the record of the last activity. The longer the history and the more activity, the larger the sample size to determine what kind of track record you have. Good or bad, most information will automatically be removed from your credit report after 6 or 7 years. You want to keep your credit report active by using your credit so that the credit bureau can get a clearer picture on how responsible you are with your available credit.

New credit (10%)

This factor addresses the concern about opening too many credit cards. As you can see, it only counts for 10% of your score, which equates to 85 points. Any time you open new credit, including a credit card or a mortgage, it will count as a credit inquiry and decrease your credit score slightly. The fear is that if you frequently apply for new credit, it can signal financial difficulty to the credit bureau.

This factor actually almost contradicts the “amounts owed” factor. You want to have more available credit so that your credit usage percentage goes down closer to the 10% mark. So even though you might get a slight hit on your credit score when you apply, it should be going back up afterwards because you have more available credit. And just keep remembering to pay your bills on time.

Types of credit used (10%)

This factor accounts for the different kinds of accounts, such as credit cards, mortgages, retail loans, etc. The different types of credit gives an indication on how you manage your money. For example, loans with a deferred interest can indicate that you are unable to save up for a purchase. Consolidation loans can show that you have difficulty paying your debts. Manage your debts well and you will be fine.


No one factor determines your entire credit score, but the 5 factors combine for a more comprehensive account. Just remember to keep all factors in mind when you worry about your credit score.

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