Demystify Your Credit Score Calculation

Understanding how your credit score goes together and how to improve it is a bit of a murky subject. The advice out there is not always consistent and depends on the financial viewpoint of the source. However, there are concrete factors that do go into the calculation of a credit score and when you understand what ingredients go into the mix, you can cook up a sweet situation for yourself. To begin, you will need to understand the many financial terms that you will encounter.

Learning the lingo

A credit utilization, or utilization ratio, is how much of your total available credit is open for use. Most of the advice you find states that a ratio under 30% is good, but a better number is under 15%. Revolving credit cards are those accounts that you can leave a balance on and roll it over month-to-month, paying over time. Examples of these would be your major name cards, some gas cards, and department store cards. Installment plans are your auto, home loans, and student loans. Charge card credit accounts are those that you pay in full each month. An example is American Express Charge Card versus American Express Credit Card. Service credit accounts are those you have an agreement with, like your utilities or cell phone service provider. In the end, having a mix of credit types helps to raise your credit score.

Helpful hints for credit scores

Another thing that helps your score is the age or history, of your credit accounts. Age counts for a percentage of your creditworthiness. The older your accounts are, the better, proof that time is on your side. Closing accounts can raise your ratio, so be careful about what you decide to do with paid-off credit cards or lines of credit. Even though you are not going to use that account, you may want to leave it open at a zero balance to help keep your ratio low. Apply for new credit only when you need to. For example, when buying a vehicle or a home, having too many inquiries for new credit in a small period can lower your score. Paying on time is a tremendous way to keep your score in a desirable range. Pay on or before the due date, every month. Keeping an eye on your utilization ratio so you can be sure to keep your score where you want.

Take the time this month to calculate your credit utilization ratio.

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