How is My Credit Score Calculated?

When it comes to getting approved for a loan, nothing is more important than your credit score; a number which indicates how likely you are to pay back your debts. A good credit score will generate more loan opportunities (at better interest rates) than a poor credit score will.

How is your credit score calculated?

The most common credit score, FICO, is calculated by the Fair Isaac Corporation. It can range from 300 to 850, with higher numbers indicating a better score. Generally, anything over 740 is considered “excellent”.

Your credit score is calculated based on five major components of your credit history, each weighted with varying importance:

Payment History – 35%

Your payment history is the most important factor of your credit score. Paying all of your bills on time, and in full, is the best way to keep this number high.

Amount Owed – 30%

Also known as your utilization ratio, this number looks at how much of your total available credit you are actually using. For best results, never borrow more than 30% of your maximum credit limit.

Length of Credit History – 15%

Determined by the average age of your credit accounts, as well as the amount of time since the account’s most recent transaction.

New Credit – 10%

Opening several new credit accounts in a short period of time signifies financial trouble, and could scare away potential lenders.

Credit Mix – 10%

This considers the different types of credit in your account: such as credit cards, student loans, car payments, mortgages, etc. Research shows that borrowers with a good mix of credit are more trustworthy to lenders.

Have questions about improving your credit score? The financial advisors at American Investment Planners, LLC are happy to assist. To schedule an appointment with one of our professional consultants, please call (516) 932-5130 or email info@americaninvestmentplanners.com.