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How Your Credit Score is Calculated (and What the Heck to Do About It

So, you wanna know how your credit score is calculated? Read on, Jefa!

Your credit score can feel like a mythical grade you’re being given on a test nobody ever prepared you for.

But, instead of a bad GPA, a bad credit score means you can’t do a lot of important life stuff — like own a home or buy a car or get a loan. 

And, sure, maybe you’re not totally certain you even want to do any of those things, but shouldn’t you at least have the option?

While it might seem like one of those life things you can just ignore and hope it goes away… it’s really not.

Like it or not, credit score is one of the most important personal finance considerations all over the world (contrary to a rumor that circulated recently that the United States is the only country to use credit scores — but that’s another story). 

So, whether your credit score is considered good or bad or somewhere in between, there’s no reason not to know how you can be in complete control of it.

And the first step is understanding how it works: what it is, how credit score is calculated, how you improve your score, and why you need one.

So, here’s your first step! The basics all in one place. And while it might seem complicated, it really doesn’t have to be as hard as you think.

What is a Credit Score?

We’re starting real simple, folks. Easing on into it.

A credit score is a number between 300-850 that describes your “creditworthiness.” AKA – whether you are considered “deserving” or responsible enough to receive loans, credit cards, rentals, etc.

The higher your score, the better you look and the more likely lenders will be to, you know, lend to you. 

Generally, a credit score of 700 or above is considered good. If you have a good or better credit score, you might end up receiving lower interest rates on loans, have less trouble being approved for rental applications, and you might even be more likely to receive loan and credit offers in the first place.

Overall, a good credit score makes life easier.

If you’re wondering where that number comes from, relax. We are getting there.

How Your Credit Score is Calculated

See? Told you we were getting there.

Your credit score is based on your credit history. Experian, Equifax, and Transunion are the three major credit reporting agencies that are responsible for reporting and updating everyone’s credit histories. 

They collect all your information and crunch the numbers to determine your credit score. 

How credit score is calculated can differ slightly between the three agencies, but most factor in data like: 

  • Number of open accounts
  • How much overall debt you have
  • Your repayment history (how often you make on-time payments)
  • Length of credit history (how long you’ve had accounts)
  • Types of credit (loans vs credit cards vs other types of borrowing)
  • New credit 

While all of these factors are taken into account, there is also a hierarchy of factors. 

For example, payment history ranks at the top, counting for 35% of your credit score. This is because lenders want to know you can be counted on to make on-time payments. 

When you pay on time, your credit card company or bank says, “Hey, Nancy paid us back just like she was supposed to — on time and everything!” Which makes other lenders go, “Hey, maybe we should lend some money to Nancy.”

Your payment track record is very important to lenders.

Next in the hierarchy is total amount owed, which counts for 30% of your overall score. This is known as credit utilization.

If you have $10,000 in credit available and you’re using $9,000 of it, this shows up as “riskier” to prospective lenders because it seems like you’re playing it fast and loose with your available credit. Down goes your score.

Other factors include length of credit history (15%), type of credit (10%), and new accounts (10%).

You’re considered more “worthy” of credit if you’ve had accounts for a longer period of time (this provides more data for your credit history report), if you have different types of credit, and you haven’t opened a bunch of new accounts all at once.

It’s all about risk factor and what makes you, the borrower, look like a safe bet.

How to Get Credit for the First Time

We know that’s a lot of information. And sometimes it’s even conflicting, right?

You need credit to build credit but you can’t open too much new credit all at once or use too much of it at the same time and you have to pay it all off right away but you can’t even get a new account until you’ve already done all of these things.


Breathe. You can get started in a couple of small ways.

  1. Open a no annual fee credit card that has monthly reporting to all 3 major credit bureaus. We recommend Citi Secured Mastercard. This will allow you to start building credit with all 3 reporting agencies and no extra hidden fees.
  2.  Try enrolling in ExtraCredit from Credit.com. This $25/month subscription service adds rent and utility payments to your credit score with all 3 bureaus. That means you’ll start building credit just by paying the bills you already pay!
  3. Similarly, Experian Boost adds your utility and cell phone accounts to your Experian credit report. The drawback here is that it only boosts your Experian report, so it won’t help you if a creditor pulls your score from Equifax or TransUnion.

Maintaining Good Credit

Once you’ve done ALL of this, maintaining good credit is straightforward, but can get messy if you’re not diligent.

Our best advice is this:

  • Pay your bills on time!! Again, this is worth 35% of your score and therefore should NOT be overlooked!!
  • Keep your credit balances below 40% of your limit. If you have a total credit allowance of $5,000, try to keep your unpaid balance under $2,000. Most credit reports will calculate your total usage for you.
  • Don’t close old or paid off credit cards. Old cards deepen your credit history (remember, length of credit history is important) and paid off credit cards will keep your utilization percentage low.
  • Don’t apply for a bunch of new credit all at the same time! Each time a creditor makes an inquiry to one of the bureaus about your score, it pings your credit score slightly. Multiple inquiries will add up and more heavily impact your score. Try to limit yourself to no more than 2 inquiries per year.

The Bottom Line

Your credit score can seriously impact your financial life. Having a low credit score can mean that you’re charged higher interest, have a shorter period of time to repay debt, require a co-signer in order to borrow or rent, or you might not be allowed to borrow at all.

Tons of people function with poor credit scores, but it sure makes life easier to have a good one. 

We hope that when you finally understand how credit score is calculated, you’ll see just how many awesome opportunities open up.

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