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Your credit score is the only crucial piece of information left out of your credit reports, including your free yearly credit reports.
Your credit score is a number between 300 and 850 that represents to lenders your financial trustworthiness. Your credit score is based on a combination of factors, some of which may surprise you, that we've conveniently laid out for you below.
Here's how your credit score is calculated:
- 35% Payment History: Have you paid all your bills or minimum payments on time? Any latenesses will count against you, and lower your credit score.
- 30% Amounts Owed: How stretched are you already? Are your credit cards maxed? Is that why you need more credit? Ideally, you want to show that you're using (read: owing) less than 30% of your available credit; or, put another way, that you still have 70% of your credit still available to you. This credit score calculation is also called your d ebt-to-credit limit ratio.
This factor is one of the reasons why canceling your credit cards once you've paid off the balances in full is not always the best strategy. If, for example, you cancel a credit card with a high credit limit, you severely lower your available credit (your credit limit) and raise your debt-to-credit limit which lowers your credit score.
- 15% Length of Credit History: How long ago was it when you got your first credit card or loan (a student loan, maybe?). Many people are in the habit of canceling credit cards once they've paid off their balances in full, thinking that this helps their credit reports, but if doing so shortens the length of their credit history, their credit score will be affected negatively, not positively, from the cancellation.
Length of credit history is calculated as an average, so if you're going to cancel a credit card, make sure it increases your average length of credit rather than decreases it.
- 10% New Credit: How many times have you applied for credit as of late? How many of your loans or credit cards are new in proportion to the overall length of your credit history? The rule here is – don't accept every good offer that you come across; they can all turn around to bite you in the end on your credit score and credit report.
- 10% Types of Credit Used: Don't have all credit cards. It's nicer to have a credit card or two, a mortgage, and maybe a car loan or a student loan and possibly a retail store card too.
All three of the major credit bureaus—Experian, Callcredit, and Equifax Credit Bureaus—calculate your credit score separately, though their individual systems for calculating your credit score are all mutually based on the same method.
Obtaining not just your credit report, but also your credit score is especially important if you're applying for a mortgage, as 75% of mortgage decisions are based on your credit score.
Interestingly enough, you can purchase your credit score through the Equifax Credit Agency (but not at all from either of the other two). If you're in the middle of obtaining your free yearly credit report from Equifax, you will be given the option to buy your credit score as an add-on. |
