How are Credit Scores calculated?

Your credit score is a very important three-digit number; it determines if you are eligible for things such as credit cards, home and auto loans. In some cases, your credit score can determine whether or not you get a job. Some people have difficulty repairing their credit scores, simply because they don't know how they are computed. Knowing how credit scores are calculated will help you keep a good score, which will qualify you for lower interest rates and higher limits on your loan.

Your credit score can range from 300 to 850; 300 is the riskiest proposition for a lender and an 850 is seen as incredibly secure. The higher your score is, the better the loan you will qualify for. A person whose score is under 500 will likely find it next to impossible to get a conventional loan.

The three-digit credit score is determined by FICO, or the Fair Isaac Corporation. They use a formula to come up with the number, and being aware of the formula can help you be more observant of your credit. The single biggest factor in raising your credit score is to pay your bills in a timely manner; this makes up 35% of your credit score. The longer you can go making on-time payments, the higher your score goes.

The next biggest factor is the deficit between your credit limit and the amount you owe, making up 30% of the score. The less of your available credit you use, the less of a risk you present to the major credit bureaus. As a rule of thumb, don't charge more than half the limit on any one credit card.

Your credit history's length is fifteen percent of your score, and canceling cards can negatively impact it. If you no longer wish to use a card, cutting it up instead of canceling it will help your score. However, if you are paying a yearly or monthly fee, cancellation is a good idea.

The remainder (20%) of a credit score is made up of credit applications and new accounts, and the types of credit you have. Many applications and newer accounts within a short period will lower your score, and having a variety of credit types will raise it. It's a good idea to have a mixture of credit and store cards, as well as installment loans.