How Your Credit Score is Calculated

Credit scores are among the most important numbers associated with a consumer's life. This three-digit number that ranges from 300 to 850 is a measurement of your presumed ability to manage your finances and your available credit. The higher your score, the more likely that you will be approved for loans and preferable interest rate programs. If you have a lower score, you will experience difficulty getting loans.

It is extremely important for consumers to understand the components that go into creating a credit score, particularly for those consumers who are doing through the process of debt management. While there is not official calculation for creating a credit score, we do know the ratios and elements that go into creating a score.

• 35 percent: Payment history. The most important factor on your credit score is also the easiest for consumers to manage. It's very simple: Pay your bills on time every month, and your credit score will benefit. Should you miss payments altogether or develop a habit of paying bills after the due date, your credit score will begin to suffer the consequences. If you are working to improve your score, make a rule out of paying your bills on time. You will benefit over time.
• 30 percent: Balances owed: Your credit score also looks at the individual balances on your existing accounts as well as the ratio of those balances to the total credit extended to you. This can be a confusing factor to follow, because there are no set rules and regulations for consumers. But as a basic guideline, you should aim to carry no more than 30 percent of your available credit as a balance on revolving (credit card) accounts. Should you carry more than 30 percent on multiple accounts over an extended period of time, it shows lenders that you're overextended.
• 15 percent: Duration of your credit history. There isn't a lot you can do in the short term to improve this aspect of your credit report. This is the area where time is on your side - provided you've been responsible. Your credit score will benefit the longer you maintain good credit with banks and other lenders. In fact, it's a good idea to hold onto credit cards for several years. Instead of closing one account and opening a new one - which shows some impulsivity - keep the same account open and in good standing for 10 years or longer. You'll reap rewards later on.
• 10 percent: Newer credit. Your credit score will measure the proportion of your accounts that are new to the proportion of your accounts that have been in good standing for several years. Translation: Resist the temptation to open up several different credit card accounts at once. While your local home improvement warehouse might be offering a great deal, and that 15 percent off at a department store sounds tantalizing, randomly opening credit accounts can show banks that you are impulsive. Remember that banks like boring consumers.
• 10 percent: Variety of credit. The types of credit you use also will impact your credit score. If you've ever heard the phrase "good debt," this is where it comes into play. If you demonstrate an ability to manage different types of credit accounts, such as student loans, mortgages, auto loans and credit cards, it will show banks that you can control your finances. If you are working to improve your credit, it will help you if you have more than just credit cards on file.