How Is Your Credit Score Calculated

If you ever want to take out a mortgage, start a business with a small business loan, or buy a car with an auto loan, you’ll need to have a decent credit score. You might not realize that you have more than one credit score and they are each calculated differently by the company providing them. Credit scores are impacted by more than just on-time payments. They typically also include the following:

  • Number of Open Accounts

  • Types of credit accounts

  • Used credit vs available credit

  • Length of credit history

  • Payment history

  • Hard inquiries

Number of Open Accounts

There is no special number of credit accounts you should have, but many credit bureaus suggest a healthy combination of credit cards and loans. Your credit score will not be docked for having too many credit accounts, but you can be punished for having too few. Five or more accounts is a recommended and reasonable number to build towards. In a two-person household, five credit accounts are not uncommon. You may have two car loans, a mortgage, your daily credit card, and your emergency credit card all open in your name. 

Types of Credit Accounts

As we stated above, it’s good to have a variety of credit accounts open to benefit your credit score. Credit bureaus may take into account the fact that you are successfully balancing your credit accounts when computing your credit score. You should have revolving credit, such as a credit card or two, and installment loans, such as a mortgage, auto loans, and personal loans. A healthy mix of these two types of accounts, especially if they’re consistently paid towards and managed, can be a benefit to your credit score. 

Used Credit vs Available Credit

Credit bureaus will also look at how much of your available credit you are actually using, i.e. what your balance is. It’s commonly stated that only 33% of your available credit should be used, but an excellent credit score will have less than 10% of available credit used. Having “maxed out” credit cards can negatively affect your credit score. How much you owe on your loans and credit cards can account for up to 30% of your overall credit score. 

Length of Credit History

Your credit score is also influenced by how long you have had each credit account open. Credit bureaus give credit score points for long-lasting accounts with successful payment history. Credit score calculations can include both how long your oldest and most recent accounts have been open.  The longer you keep a credit account open and in good standing, the more positive its impact will be on your credit score.

Payment History

Your payment history is a huge factor in calculating your credit score. Credit bureaus will look at how late your payments have been, how much was owed at each time of payment, and how recently and often you have missed a payment on your credit account. They will also take into account how many accounts have been delinquent in comparison to how many accounts you have open. For instance, one delinquent account from 10 years ago may not have a large impact on your credit score today, but a delinquent account from last year can lower your score significantly. Ratios also matter when calculating your credit score. One delinquent account out of 10 accounts will affect your credit score less than 5 delinquent accounts out of 10 will. Payment history accounts for up to 35% of your overall credit score.

Hard Inquiries

Hard inquiries occur when a lender checks your credit and will negatively impact your credit score. Creditors may check your credit for a mortgage application, auto loan, or utility provider, but hard inquiries often have shopping windows available. If you are shopping for a mortgage, you may have up to 30 days to apply with multiple lenders without another hard inquiry showing up on your report. 

Why Is My Credit Score Never the Same?

It’s more often than not that you go to check your credit score using one of the three major credit bureaus, and none of the three scores match up. Credit bureaus don’t always collect the same information, nor do they interpret it in the same way. However, you can assume that your official credit score is somewhere between the highest and lowest shown scores. 

Encore Bank Can Help

Whether you need additional assistance from a financial professional or simply want to discuss the benefits associated with banking with Encore Bank, contact one of our banking professionals. We can help you open a credit card, apply for a mortgage, and even create an action plan to increase your credit score.