Your credit score isn't just a number. It's one of the most important numbers that you will ever come across. This little 3 digit number decided if you will be approved to buy a car, buy a house, get a job, rent a car and more! Although, we often come across articles that explain how to improve your credit score, many often miss the most important information that you can know about your score. What determining factors are included when coming up with your credit score? Let's face it, to understand how to build a house, you have to take a look at the blue print. Well, here's the blueprint to your credit scores. Below, you will find the most important factors taken into account when deciding your credit score!
Factors That Are Used In The Calculation Of Your Credit Sore
- Number Of Revolving Debts – Do you have a lot of different credit cards, signature loans and other unsecured loans? If so, this may be hurting your credit score. One sign of financial instability is overuse of unsecured loans. This is because consumers can skip out on these loans a lot easier than consumers could on other, more secured loans.
- Average Life Of Revolving Debts – Another huge factor used in the calculation of your credit score is your experience with revolving debts. The way credit reporting agencies measure your amount of experience with revolving debts is the amount of time that you have worked with active accounts. Therefore, opening a new account reduces the average life of your accounts and may have a negative impact on your credit score. This is a little something to remember when thinking about applying for that store credit card to save 10%!
- Payment History – Now we get into one of those factors that is talked about frequently. Obviously, your past payments will show a pattern that can be expected for your future payments. Therefore, if you have a lot of missed or late payments in your past, chances are, you have a bad credit score. This is why it is so important to get into the habit of paying your debts at least 2 weeks in advance. By doing this, you no longer leave yourself open to variables that may cause you to pay late!
- Debt To Income Ratio – When we think about the debt to income ratio, it's easy to understand why this is included in the calculation of your credit score. If you are overextended with debt, no matter how great your payment history was in the past, chances are your forecast shows late payments soon to come. Therefore, credit reporting agencies compare your debts with your income. If your revolving debt to income ratio is over 10% your credit score may start to decrease.
- Debt To Available Credit Ratio – Finally, an incredibly important factor in the calculation of your credit score is how much revolving credit you have used and how much you have available. The general thought is that consumers like to keep a financial pillow of about 50% of their credit limit available for emergencies. Therefore, if your debt to available credit ratio is above 50%, chances are, your credit score is not that great right now.
This article was written by Joshua Rodriguez, proud owner and found of CNA Finance and avid personal finance writer. Join the conversation with Josh about this article or any personal finance topic of your choice on Google+!
Image thanks to American Express.