What Is My Credit Score & How Is It Calculated?
Many Americans wonder about their credit scores every year. It is a good thing to wonder too, seeing as 25% of all American’s credit scores are lower than 600, the Wall Street Journal has stated. That is a large number of people that are without access to getting a mortgage, which, in turn, can make real estate purchases a bit more difficult. Especially if you intend to purchase real estate with a mortgage loan.
What Is A Credit Score?
A credit score is a number given to each individual in the United States to determine if they are good for the word when it comes to money. At least, that is what a credit score is in simple terms. In reality, your credit score is a bit more complicated than that. Technically known as your FICO score, this number directly impacts your ability to get mortgage loans, auto loans, and other financial loans.
Did you know that you can also be turned down when renting a house because of your credit score? A lot of landlords want to see your credit score to determine if you are good for your debts or not. Their logic is “How would you pay them if you can’t pay other debts?” and that is sadly sound logic.
Your credit score basically determines your trustworthiness with cash and can even have a say in where you work! Most employers don’t look at your credit score before they hire someone, but some will. Their goal is to see if you can pay for any damages you may be responsible for at work.
So, How Is It Calculated?
In truth, creditors are particularly tight-lipped about how credit scores are really calculated. There is some information out there, though and we, thankfully, have it. Would anyone be happy if no one had a clue how credit scores were determined? No!
It is bad enough that we don’t have a say in if we have a credit score or not. It is basically forced on U.S Citizens from either birth or immigrated into the country. Even better is that your credit score can be high and mean absolutely nothing. How is this possible? Well, your credit is going to start off looking good, but if you haven’t used it for anything yet, then what credit do you have?
An 18-year old’s credit can start off anywhere between 300 and 800. What makes that sound even worse is that no one but the major creditors knows how that works. If credit scores weren’t already so important in the United States, they are so absurd that no one would probably pay attention to them.
In any case, the graph below shows how your credit score is determined by dividing up the main credit factors that contribute to each person’s individual score.
As you can see, The biggest aspect of anyone’s credit score is their payment history. That is why an 18-year-old individual has no credit. They’ve likely never made payments on anything. Life tip: have your teenage child start paying their own cell phone bill as early as possible, those usually apply to credit scores.
Next is the amounts that are owed. Fun fact: you can have a high credit score but still have no credit to get a loan. Why? Because your “amounts owed’ is simply too high a number. The term “over-extended credit” comes to mind, as that is what that is called.
Then you drive into the length of credit history and new credit. New credit is good because it means that you are using your credit. Length of credit history is just what it sounds like: how long you’ve had accounts open with debts owed.
There are also different types of credit. Your standard credit isn’t actually mixed with your medical credit. Basically, unpaid hospital bills won’t prevent you from buying a house. However, they also don’t impact your credit score quite as much.
The Determination
Keeping a good credit score is ridiculously hard. You want to have open accounts with debts owed but your payment history on them must be spotless. The amount of time you’ve paid on those debts faithfully also applies to your credit score. New lines of credit are very helpful for keeping your credit score from becoming stagnant.
Oh, and one last tip: don’t do hard checks of your credit if you can help it. Mortgage lenders and auto loan lenders always do, but you can use free credit check websites that do soft checks instead. Hard credit checks knock off a few points of your credit score with every hit.
