Credit Score Calculation
Most consumers are vigilant when it comes to the issue of their credit score, especially when evaluating credit card debt solutions. This is certainly understandable, as their score will have a big impact on the cost of credit that is extended to them. When it comes to a loan for a home or a car, the bottom-line dollar effect can be quite substantial. A further concern is the fact that many employers are now reviewing the credit reports of their job applicants and factoring the information they unearth into their hiring decisions. This aspect has become an even greater concern for consumers seeking credit card debt relief. Given the clearly vital role that the credit score plays in their financial lives, it is surprising that many consumers lack a good understanding of the factors that contribute to the actual calculation of their scores. This article will shed some light on the subject in hopes of clarifying some key issues.
There are 5 variables used by the 3 credit bureaus (Experian, Equifax and TransUnion) in calculating a credit score. Additionally, we know how heavily each of the 5 variables is weighted relative to one another. So while the actual formulas used by the bureaus are not public knowledge, we can get a very good idea of the impact that certain financial activities will have on a credit score. Here are the 5 variables and the relative percentage of impact assigned to each:
10% – recent new credit requests
10% – the types of credit accounts, whether they are installment or revolving
15% – how old the credit accounts are
30% – the unused credit that is available for use
35% – making payments on time
Most consumers seem to believe that just making their payments on time will guarantee them a good score, however a look at the numbers tells quite a different story. In fact, the other 4 criteria outweigh the importance of timely payments by 65% to 35%, or nearly double.
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