How is a credit score calculated?

Credit scores often feel like a mysterious number that plays a huge role in our financial lives. Whether you’re applying for a loan, renting an apartment, or even getting a new cell phone plan, your credit score can influence the outcome. But have you ever wondered how those three-digit numbers are calculated? Let’s dive into the world of credit scores and shed some light on the process.

1. Payment History (35%) 📅 The first major factor that goes into calculating your credit score is your payment history. This accounts for a whopping 35% of your score. It’s pretty straightforward: making your payments on time boosts your score, while late payments can lower it. This includes credit cards, loans, and even things like utility bills.

2. Credit Utilization (30%) 💳 Coming in at 30% of your score is your credit utilization ratio. This is the percentage of your available credit that you’re actually using. For example, if you have a credit card with a $1,000 limit and you’ve charged $300, your utilization rate is 30%. The lower, the better! Keeping this rate below 30% can have a positive impact on your score.

3. Length of Credit History (15%) ⏳ The length of time you’ve had credit accounts for 15% of your score. Lenders like to see a long history of responsible credit use, so it pays to keep old accounts open and in good standing, even if you don’t use them regularly.

4. Credit Mix (10%) 🔄 Your credit mix accounts for 10% of your credit score. Lenders like to see that you can handle different types of credit, such as credit cards, installment loans (like car loans), and mortgages.

5. New Credit Applications (10%) 📋 Every time you apply for new credit, it can ding your score a bit. This is because multiple inquiries in a short period may indicate financial stress. So, be cautious when applying for new credit, especially if you’re planning a big purchase soon.

6. Public Records and Collections (0-100%) 💼 Lastly, public records like bankruptcies, tax liens, and collections can significantly impact your credit score. These negative items can stay on your credit report for several years, so it’s essential to address them promptly.

So, there you have it! Your credit score isn’t some enigmatic number generated by a wizard behind the scenes. It’s a result of a few key factors that lenders use to assess your financial responsibility.

Remember, building and maintaining a good credit score takes time and consistent effort. Pay your bills on time, keep your credit card balances low, and avoid opening too many new accounts all at once. Over time, you’ll see your credit score improve, opening doors to better financial opportunities. Dovly’s AI credit engine can get you a head-turning credit score with credit (re)building, monitoring, alerts, scores, tips, and tricks – all in one place. Try it risk-free with our free membership tier.

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