How Your Credit Score is Calculated

Credit scores could be the most important number associated with being a consumer. But unfortunately for the millions of Americans who rely on credit scores to help get approval for a home loan, car loan, credit card or other financial transaction, there's no set way to calculate your credit score. In fact, it can be nearly impossible to guesstimate exactly how an adverse situation could affect your credit score.

Credit scores, also called FICO scores, measure your overall credit worthiness. In other words, it's a grade that assesses how likely you are to repay the money you borrow and, essentially, be an honest borrower. Credit scores can range from 300 to 850. The higher your score, the more likely you will be permitted to borrow money (in the form of loans or overall credit). In general, if you have a score above 700, you will be considered in the "good" credit range; should your score fall below 640, you run the risk of being categorized as "subprime."

Creating credit scores

If you are in the process of considering debt consolidation in Kansas, or are simply looking to better manage your money, it's essential that you understand your credit score and the components that go into creating it. While there is no set formula, these factors are likely to have the most impact on your credit score, and your overall financial livelihood.

• Payment history: 35 percent. One of the most critical factors in your credit score is your day-to-day habits in dealing with credit. Do you pay your bills on time every month? Do you occasionally pay more than the minimum? Consumers who always pay their bills on time are more likely to have higher credit scores than those consumers who miss payments on occasion. This can be one of the easiest ways to improve your credit score if you are having credit issues. If you encounter a month in which you can't make a minimum payment or pay your bill on time, call your creditor immediately. Instead of ignoring the issue, make a call and try to come to an arrangement.
• Amount owed: 30 percent. Think of your credit like a bucket of water. The more you fill the bucket, the greater the chance it will spill over when you carry it around. Your credit runs a similar risk. If you rack up high balances and carry them from month to month, you run the risk of going over your limit or defaulting on your credit agreement. As a rule of thumb, try to never carry more than 30 percent of your allowable credit from month to month. By doing this, it will demonstrate that you are using your available credit wisely.
• Credit history: 25 percent. Your new credit accounts as well as the duration of credit history can affect you positively or negatively. Only apply for credit when you need it - opening and closing credit-card accounts randomly can be an indication that you aren't reliable when it comes to money. If you open an account, keep it for several, several years.
• Variety of credit: 10 percent. Credit scores tend to go up if a consumer shows that he/she can borrow and manage a variety of credit accounts. So if you have a credit history that shows student loans, credit cards, home loans, auto loans or lines of credit, it also shows that you are capable of effectively managing your money. Keep this in mind as you expand your credit portfolio.