Financial Education

Learn how to calculate your credit scores!

Understanding how your credit score will be calculated is the first step to increasing it. So, find out essential information about it and start improving your personal finances!

Advertisement

by Julia Bermudez

Published on 02/13/2022

Credit Scores are essential info you need to know: find out how to calculate it here!

Calculate your credit score and increase from poor credit score to an excellent one
You can learn how to calculate your credit score and understand the range of it. Source: Adobe Stock.

Do you know how to calculate your credit score? Some people don’t even know that this score exists and how important it is.

For your social life is really important to be a good person. For your finances is important to be a good buyer and a good payer. Certainly, in case you need a loan, the lender needs to know if you are trustful. For that to happen, the lender won’t ask if you help people out, volunteer at the animal shelter, or give food to homeless people. He’ll check your credit score.

Your credit score is the number that sums up your credit activity during your life. It may vary according to the moment you are living, and the stages you reach with your credit cards and loans.

However, it is not an untamed and wild number: there are feel things you can do to control it and get a better score. You may need it at any time, so it is better to guarantee. Learning how to calculate your credit score is basic info for a healthy financial life. 

Stay with us to get this precious information and learn how to calculate your score.

Cartão American Express Centurion

American Express Centurion credit card review

This article is a review of the American Express Centurion credit card. So, learn more about this card which is famous for its exclusivity and luxurious benefits!

Advertisement

What are credit scores and their types?

So, what are the different types of credit scores? Source: Unsplash.

So, let’s recap and explain it better. A credit score is a number that puts you on a scale and helps the lenders to make a decision to grant you the loan or not. That is because a loan is a trust contract. The lender will give you something in advance, and needs to know how likely you are to give it back. This will be analyzed through your financial habits.

It will also determine the interest rates you’ll face. The higher your score, the lower your interest rates. By the way, some daring lenders will look for the people with low scores that are desperate for a loan. They charge exorbitant interest rates for a little amount of money lent because they know that person won’t have a better choice. 

Credit Bureaus have different models to make statistical analyses to get to the credit score. In the US, the principal credit score model is the FICO. They are considered the most reliable and are largely used by lenders. This is how the credit score range is considered in their model

300 – 579: Poor credit score. You probably won’t get any loans, except for the ones from ambitious lenders.

580 – 669: Fair credit score.

670 – 739: Good credit score.

740 – 799: Very good credit score.

800 – 840: Excellent credit score. This will open every door you want to get loans and expand your credit limits.

There are other models of credit scoring models: Vantage Score, Credit Expert, Insurance Score, Trans risk, and others. Each one of them will have a different way to calculate the credit score, but the habits you’ll need to be considered a good payer are largely the same.

How is credit score calculated?

Even though there are different credit scores, the following five parameters are the ones you need to pay attention to. This is how the majority of lenders will calculate it, even though some may consider only a specific kind of activity depending on the nature of the business. 

These are the major components of your credit score:

Advertisement

1) Payment history

This parameter will tell the lender if you are a good buyer and especially a good payer. To keep a good score in this component, you need to have consistent use of your credit accounts. Also, you need to have a good history in payments, with no delays. Bankruptcies, collections, and delinquencies will also imply in this parameter.

2) The length of your credit history

The sooner you start to make good use of a credit card, the better your credit score can be. A long credit history with no delay in payments will show the lender you have experience and responsibility for using credit. Some people avoid having credit cards. They think it’s a risk of creating unnecessary debt.

3) Types of accounts you have

To calculate your credit score, lenders will also consider how you can manage multiple credit accounts. Remember that it is important to be a good payer, otherwise, it will decrease your score. Each type of account will be considered in different types of loans you may ask:

  • home loans
  • credit cards
  • mortgage and home equity loans
  • studant and personal loans

4) Amount owed

You need a good rate between the used credit and your credit limit. If you are always too close to the limit, this could show creditors you’re always too close to having no money. If you are always too close or above your limit, you are a potential risk for the lender. A good strategy to keep your score high is to keep a good marge to your limit and pay it frequently.

5) Recent credit activity

Before opening a new account, consider that this will affect your credit score. Ask for a lot of new credit accounts and loans in a short period of time can indicate financial trouble. However, this will not kill your score, because one parameter can balance the other. So, asking for new loans may momentously drop your score. But if you’re a good and responsible payer, your score will increase again. It is not a question of right or wrong – it is about timing and strategy.

What is the credit score algorithm?

Boost your credit score by being a good user of your credit accounts. Source: Unsplash.

The exact credit score algorithm is kept a secret by the credit bureaus. You can not precisely calculate your credit score. But we do know the proportion rate of that five major factors. In order of importance, this is the proportion:

35% – Payment History

30% – Amount Owed

15% – Lenght of credit history

10% – Types of accounts

10% – Recent credit activity

So even if you can’t calculate the exact 3 number digit, you can consider the importance of each one. Pay attention to the more important ones, but do not neglect the lower ones. They may the drop you need to get a good loan with good interest rates.

Who determines a credit score?

There are some institutions that determine the credit score – the Credit Bureaus. Your score can be different in each one of them. However, the lender is the one who will choose which one to consider, not you. To guarantee, you better have a good score in all of them.

Now that you understand how a credit score is calculated, it is important to know which cards you can apply for. In the article below, you’ll learn more about the American Express Platinum, a credit card that requires good credit scores!

Cartão American Express Platinum

American Express Platinum credit card review

VIP access and exclusive benefits in hotels, airlines, and entertainment services: learn everything about the American Express Platinum credit card!

About the author  /  Julia Bermudez

Julia Bermudez is a writer here on this portal. Since childhood, writing has been a passion, and her curiosity for different subjects led to this profession. Julia has a degree in Cultural Production, and her subjects of most significant interest are health, finances, and self-development.

Trending Topics

content

How to buy cheap Alaska Airlines flights

Enjoy your upcoming adventures by spending less! Discover where to buy cheap Alaska Airlines. Check it out!

Keep Reading
content

Capital One Savor Cash Rewards Credit Card vs. Capital One Walmart Rewards® Mastercard®: card comparison

Capital One Savor Cash Rewards Credit Card or Capital One Walmart Rewards® Mastercard®? Compare them and find out which one is best for you!

Keep Reading
content

5 best credit cards for groceries

Discover the best credit cards for groceries and their benefits, such as cashback, welcome bonus, $0 annual fee, and more. Keep reading!

Keep Reading

You may also like

content

Rewards program: what to consider before you choose a credit card

Discover what you should consider in a rewards program and what to look for in one. Read on to learn more!

Keep Reading
content

Application for the Discover it® Secured card: how does it work?

If you're looking for a secured card with fantastic benefits, you just found it: the Discover it® Secured card. Learn how to apply!

Keep Reading
content

Learn to apply easily for 247LoanPros

If you are considering applying for a loan with 247LoanPros of up to $35,000, use this guide on how to apply. Keep reading!

Keep Reading