Your credit score is calculated by three national credit bureaus: Experian, Equifax, and Transunion. Credit problems are reported to one or more of these agencies, and credit checks are sought from one or more of these agencies. Their scorekeeping is complex, but based on certain fundamental principles. These include:
1. Amount of credit history. In order to get credit, you have to have previously accumulated credit, such as educational loans or mortgages. But if you have always paid your bills up front in full or are just starting out as a self-supporting adult, then you will have no credit history, and no one will lend you money for anything without a cosigner. Even then, it takes several years of consistent (and good) credit scores based on good credit behaviors to obtain even a moderately low-risk score.
2. Prior debt payment history. Once you have incurred debt, with or without a cosigner, then how promptly and consistently you make your scheduled payments affects your credit score positively or adversely.
3. Types of credit. To boost your credit score as much as possible, you should incur both installment and revolving debts,
especially with high limits, and then pay them regularly on schedule.
4. Percentage of credit currently in use. You should try not to have more than a ten percent balance at any time of your total of revolving debt limits. The idea is to show that you are not pushing your limits on all your credit cards and are paying down your debt regularly.
5. Current debt. Your record of debt payments, whether favorable or not, is the credit bureaus’ indication of your overall ability to pay your debts. The credit bureaus have no information on your income or your other financial obligations, so your debt payments are what the credit bureaus use to determine your present creditworthiness.
6. Calculating your credit scores. The credit bureaus do not combine the scores to arrive at an average, but lenders do. Some might only average all three scores, but others will factor-in details from each bureau’s report and set a score based on their own formulas. Usually, the combined score is very close to the individual score at any one of the credit bureaus.
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