How to calculate your credit score
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Your credit score is an important number that lenders use to determine your creditworthiness. It can impact your ability to get loans, rent an apartment, or even land certain jobs. But how is a credit score calculated? In this article, we will guide you through the process of calculating your credit score and provide tips on how to keep it healthy.
1. Understand the Components of Your Credit Score
There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. These companies each calculate a credit score based on various factors. The most commonly used scoring model is FICO, which takes into account five main components:
– Payment history (35%): Your track record of making on-time payments is the most influential factor in determining your credit score.
– Amounts owed (30%): This is the total amount of debt you owe compared to your total available credit – also known as your “credit utilization ratio.”
– Length of credit history (15%): A longer track record of managing credit responsibly is more favorable for your credit score.
– New credit (10%): Opening multiple new accounts in a short period can negatively affect your credit score as it may indicate riskier financial behavior.
– Credit mix (10%): A diverse portfolio of various types of credits, such as mortgages, auto loans, and credit cards, can demonstrate responsible borrowing habits and lead to a higher credit score.
2. Gather Your Credit Reports
Before calculating your credit score, you need to obtain your credit reports from each of the three credit bureaus. You are entitled to one free report per year from each bureau under federal law. Visit annualcreditreport.com to request yours.
3. Analyze Each Section of Your Credit Report
To make sure that you have an accurate understanding of your financial history before calculating your score, examine each section of your credit report for errors or discrepancies. Common sections to review include:
– Personal Information: Check for errors in your name, address, and Social Security number.
– Accounts: Make sure all open accounts are accurate and no fraudulent accounts have been opened under your name.
– Late Payments: Ensure that any reported late payments are accurate.
If you find any inaccuracies or discrepancies, initiate a dispute process with the respective credit bureau.
4. Estimate Your Credit Score
While obtaining your actual FICO score may require purchasing it from the credit bureaus, you can get a rough estimate – often referred to as an “educational score” – using several free online tools. These tools use the same components as FICO but with slightly different weightings and calculations. Keep in mind that these estimates will not be as precise as an official FICO score but can still provide a useful insight into your financial standing.
5. Tips for Maintaining a Healthy Credit Score
Now that you have an understanding of how credit scores are calculated, consider these tips for keeping your score healthy:
– Pay all bills on time: Even if it’s just the minimum amount, always ensure timely payments to avoid hurting your payment history component.
– Keep your credit utilization low: Aim for a utilization ratio below 30% to demonstrate responsible borrowing habits.
– Do not continuously apply for new credit: Limit new account openings to when necessary and avoid applying for multiple accounts within a short period.
– Monitor your credit reports: Review your reports regularly and promptly dispute inaccuracies.
Understanding how your credit score is calculated is crucial for managing and improving it over time. By following these steps, you can gain better control over your financial future and work toward building a strong and reliable credit history.