Calculating Credit

Credit can be a somewhat mythical or confusing concept to many. How do you establish credit? What is a good credit score? How do you even calculate a credit score?

We break down how your credit score comes together and what you need to know about increasing it.

Your credit score may vary
You may notice that your credit score may vary by a few points dependent on where it is pulled. There are three major credit bureaus: Equifax, Experian, and TransUnion. Some lenders, creditors, or other financial institutions may only report to one or two of the three major bureaus, which means the calculations may differ.

Payment history
Timely payments are an essential piece of building a good credit score. When a creditor considers an application, they will want to be sure that payments will be given to them in a timely manner. Your payment history accounts for nearly 35% of your total score, which means it is extremely important to prioritize submitting payments on time each and every month. Each time you miss a payment, your score will be negatively affected.

Amount owed
The amount that you owe on a loan or credit card is what makes up nearly 30% of your total score. The entire sum of money you owe is calculated, and the types of loans you have are considered to make up this number. The closer you get to paying off the loan, the higher your score will go.

Credit history
The longer your history of paying in a timely manner, the higher your score will be. This shows creditors that you are a trustworthy candidate for a loan when you have more experience with credit. It is similar to applying for a job: if you have experience in a particular field, you’re more likely to get hired. The same thought applies to credit—if you have used credit well in the past, you are likely to use it well in the future.

Types of accounts
15% of your score is determined by the types of credit accounts you have. Having a mixture of different credit lines is likely to improve your score. The various types of credit that most bureaus consider may include the following:

  • Installment loans (auto loans, student loans, furniture purchases)
  • Mortgage loans
  • Bank credit cards
  • Retail credit cards
  • Gas station credit cards
  • Rental data

Recent Credit Activity
The final 10% of your credit score is calculated by your activity in recent history. For example, if history shows that you have tried to open multiple accounts at once, it could be a sign to creditors that you are in financial trouble. While this accounts for a small portion of your overall credit score, it is important to keep in mind as you think about your candidacy for a loan or line of credit.