It may seem like dark magic is in control of your credit score but it’s actually a fairly straightforward formula. Different credit agencies do things in slightly different ways but the overall system of how credit score is calculated is logical once you know how it all works.
As every aspect of your financial life is controlled by your credit score, it makes sense to outline exactly what influences the score you are given.
Factors That Influence How Credit Score Is Calculated
The following are the typical criteria credit reference agencies use to calculate a credit score:
Payment history: Your payment history makes up a significant portion of your credit score. This is a record of every credit account you have ever had and whether you always paid on time or ever missed a payment.
Credit utilization ratio: This is a calculation of the total amount of credit you have available to you with how much of it you’re actually using.
Total debt: A tally of all the debt you have in your own or joint names.
Credit mix: is a list of the type of credit you’re using, credit cards, car loans, mortgage and so on.
Credit account age: This outlines the age of each of your open credit accounts.
Public records: Refer to bankruptcies or other civil judgements you may be subject to that would influence your financial health.
Hard inquiries: This is a list of how many hard inquiries you have had recently. Hard inquiries are created by applications for credit.
When we discuss the importance of paying on time or knowing your credit utilization ratio, this is why. While this list is in no particular order, those two elements make up a significant part of your credit score.
Any missed payment and any loan defaults will be listed in your payment history. The number of credit cards and loans you have versus your income will be counted in your credit utilization ratio. Both can seriously impact your credit score, which is why we are so hot on them.
The total debt, credit mix, credit age and public records all have an incremental effect on your score while hard inquiries has slightly more impact.
Not All About the Numbers
Getting a loan decision isn’t just about the numbers. Your credit score does have an impact but your overall financial health is just as important.
Lenders also look at whether you use credit much or not. Whether you have just applied for a series of loans within a few weeks of each other, whether there are any public records about any of your financial dealings and whether you have used debt to create much of a credit history at all.
So, this is how credit score is calculated. Your credit score counts for a lot, there is more that goes into a lending decision than just numbers!
For those of you who know that you have a challenging credit situation, please visit Dixie Auto Loans where we have a team of credit specialists ready to help you get approved for a car loan today!