What’s in a Credit Score?

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Even if you’ve never tried to borrow money from a lender, you know that credit scores are an important part of your financial health. They’re used to determine the creditworthiness of an individual should they ever need to use or obtain credit for a variety of reasons. We know this, but we might not know exactly how a credit score is figured or what we should look for in our reports.

Your credit score is calculated by five different factors: payment history, account balances, length of credit, types of credit, and how often you’ve applied for a new line of credit over the years. Your score can be lower because of high balances, late payments, or applying for too many lines of credit too rapidly. Your score can increase in number when you’ve paid off debts, made timely payments, and kept your balances low.

When it comes to how much bearing these individual factors have on your score, it’s calculated that payment history makes up about 35% of your score while account balances equal 30%. The rest of the factors cover the remaining 35% of your score, with account life making up 15% and both types of credit and how often you’ve applied being worth 10% each.

Keep in mind that account balances might be high in number and still improve your score, as long as they’re low relative to the account total. For example, if you’ve got a credit card worth $15,000 and you only have $3,000 on the balance, this is actually going to help your score.

You should check your credit periodically to monitor the number, because although the three different credit bureaus are generally great databases, they are not above making mistakes. If someone has a similar name to yours, their debts may very well show up on your report. If you notice any entries that do not look familiar, it’s important to have them dealt with as soon as possible.

Your credit score and report should be treated with vigilance, the same way you treat your other accounts. It’s better to be on top of the activity before you need to use your score for a mortgage application, rather than waiting for a small problem to become serious.

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