Credit Score - 5 Factors The Bureaus Use to Calculate Your Score

Your credit score can force you to pay thousands of dollars or save you thousands of dollars a year. It is a three digit number that has a huge influence on your life.

The formula for calculating your credit score is a mathematical equation. This equation is not released to the public out of fear that people will use the information to make sure they have a good credit score.

We would think the credit bureaus would not have a problem with you making sure your credit was good. However the credit bureaus are not earning money form the consumer. The bureaus customers are lenders. Lenders want applicants to have negative credit on their report because they can then charge a higher interest rate and earn more money.

These are the five influencing factors on your score. You will also find approximately how much each factor impacts your score.

1. Payment History (40%)

This is the most important. Your credit report shows your balance, your payment history, your credit limit and the minimum payment.

If you have a credit card that is always at the limit then this will hurt your score. But if you can make big payments on this account it can help your score.

This is where negative marks are taken into account. You can remove negative marks by disputing the mark with the credit bureau or settling the debt.

You should first try and dispute the mark and if that is unsuccessful then make arrangements to settle the debt. However make sure to get the creator of the negative mark to remove the negative item from your report in exchange for your payment. I suggest to getting this agreement in writing.

2. Ratio of Debt to Available Credit (30%)

In other words how much credit do you have that is not being used? Are all your credit cards maxed out?

It will help your credit score if you can show the credit bureaus that you have available credit that is not being used. This is most effectively done by keeping the balance of your credit card at approximately 10% of your credit limit. This means if your limit is $1500 and you consistently keep your balance at $150 then you are showing the bureaus two things. One that you use credit and two that you use it responsibly. This will help your score.

3. Pursuit of New Credit Lines (10%)

How often is your credit run? If it looks like you are constantly having your credit checked your score will be lowered.

On your credit report is will show the frequency of your credit being run. So you should not be constantly making purchases using your credit or be trading in your car every couple of months.

Credit bureaus know that your credit will be checked.

Just try to make sure your credit is not being checked on a regular basis. There are people that buy cars and trade them in every three months and switch their phone plans regularly. For those their score will be lowered because of this.

4. Credit Experience (10%)

This is not really something you can control or should worry about. It reflects what type of purchases you have made.

This means what have you used your credit to buy. Do you have a mortgage, a car loan, credit cards, and etcetera? They say the more diverse it is the better, however it does not carry much weight in the equation.

5. Length of Credit (10%)

How long have you been using your credit? Did you just get your first credit card?

Do not worry about this factor. If you are new to the world of credit you can still have a great score.

In sum, only worry about the first two factors listed. However for your own knowledge the other three are looked at when your score is calculated.

If you take care of the first two factors then your score will be high. With a high score you can take advantage of rewards, automatic approval and save thousands with low interest rates.