How Credit Bureaus Calculate Your Credit Score

The three major credit reporting bureaus all use a similar formula based on the Fair Isaacs formula, a proprietary mathematical algorithm that spits out your credit score number based on a bunch of information about you. The math part isn’t really what you need to know, though. What you need to know is what information goes into making your score and what type of information is the most important for your score.

Basically, your credit score is based on information about your entire financial life, including your debt, payments, and open accounts. The information that goes into your score, though, is weighted. This means that some categories count for more than others. Here is a breakdown of how the credit bureaus weight information, in general, to obtain your credit score.

The largest chunk of your credit score is based on the way you pay your bills. About 35% of your score is based on this information. Recent information counts for more here, but older information counts, too, especially if it’s something like a bankruptcy. It takes some time for missed payments, collection’s notices, and bankruptcies to fall off of your credit report, so these things may take some living down if you’ve been through them.

Next most important on the list at 30% of your score is your debt to credit ratio. This is the amount of money you owe versus the amount of money you’re allowed to borrow based on things like credit cards and lines of credit. The lower your debt compared with your credit, the better off you’re going to be in this category.

15% of your credit score has to do with the length of your credit history. The longer you’ve had good credit, especially credit in good standing, the more you’re going to get in this category. This is why you don’t want to close your oldest account after you’ve paid it off, necessarily.

Next, 10% of your score goes to each of two categories: mix of credit and recent inquiries on your report. It’s a good thing to have credit from different things, such as a car, a credit card, and a mortgage. It’s also a good idea to keep inquiries for your credit report low. If a lot of people are asking for your score, lenders will assume you’re getting ready to take out more loans, which makes you a higher risk client.

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Fixing Bad Credit One Step at a Time

Bad credit can really ruin your life. It can cause you to be unable to get a home loan or a car loan. It can even keep you from getting the job of your dreams, since more and more employers are checking credit reports before deciding who to hire. You don’t have to let bad credit ruin everything, though. You can actually fix it, as long as you have the right tools and the right steps to follow.

Step one of fixing your credit is knowing exactly how bad the problem is. This means that you need to spend time looking over your credit reports and credit scores. Sometimes when you do this, you’ll find that part of your problem isn’t your problem at all. Sometimes part of the issue is mistakes on the part of the credit reporting company. It’s estimated that about 70% of credit reports contain errors, some of which dramatically change a person’s resulting credit score.

Step two of fixing your credit is starting to address the problems you can work on right away. One of the major reasons people have a bad credit score is because they don’t pay bills on time. If you can’t make the payments, you might need to cut out unnecessary things like your cable and Internet bills. Another option if you have trouble with cash flow is to rearrange your due dates, if possible, so that they are due after your paychecks. Of course, you can always do it the old fashioned way and save some money to pay next month’s bills, too.

Another major reason for bad credit is a high debt to credit ratio. This means that on revolving debt like credit cards you’re carrying high balances relative to the credit you have available. It’s best to carry less than 50% of your overall credit allowance. Any more than that, and your credit score will definitely suffer. The best way to deal with this problem is to simply pay down your credit cards as much as you can.

Finally, there are some things that you just have to wait out. You can’t get rid of a bankruptcy on your report for a certain number of years, depending on which type you filed. You also won’t be able to get rid of things like notices of late payment until they are off your records in a few months or years, depending on the situation. You need to do what you can, and the rest of these things will take care of themselves over time.

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Using a Credit Card Wisely and Well

Credit card debt is some of the worst debt you can have. It’s dangerous debt for consumers and creditors alike. This is why interest rates on credit cards are so high. The banks who are issuing the cards know that they might lose a customer to bankruptcy, and they charge astronomical interest rates to make sure that they make money off of every possible customer.

Credit card debt can weigh down your monthly budget with unnecessary payments, and it can also cause your credit score to take a huge hit. This type of debt is known as revolving debt. This means that instead of taking out a certain amount of debt and paying it off in a certain amount of time, you can take out more and more debt, within certain limits, every month. This means that this type of debt is unpredictable, so it counts seriously against your credit score if you have a lot of it.

You can, though, use a credit card wisely and well with the right tools and self discipline. The key to all of this is that you know you’re using the card for the right reasons. You don’t need to live off of a credit card, but you can use it to build up your credit. The way you do this is to open a credit card and use only what you can pay off within a month. Then, you will have a low debt ratio, so you’ll have a good credit score.

One way to do this is to use the credit card only for particular types of purchases that you know you’ll be able to pay off within a month. For instance, you might choose to use your card only to pay for gas. Then when your bill comes in, you pay it off in full every month.

This can get you points in a couple of ways. First off, it means that you’ll have a low debt to credit ratio. You can’t have a ratio at all unless you have some credit available. If you have a credit card limit but carry no balance, you’ll have a good ratio that will cause your credit score to increase.

Also, if you pay your card on time every single month, you’ll be able to rack up credit score points for paying your card on time. It’s important that you’re never late, though, as even one late bill can really sink your score.

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