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How Are Credit Scores Determined?

Yes, the dreaded and mysterious credit score which is a far more important number in our lives than anyone would like to admit. However, few of us understand how are credit scores determined. Truthfully, it matters because it dictates how much we pay for any type of loan we need whether it is short term loans in the form of a credit card purchase or a lease on a new car. Your credit score determines your interest rates which will determine how much you will have to pay to borrow the money you need. You want to improve your credit score as much as possible.

For something that is so important in our lives, it is odd that very few people know their score and how it is determined. The five factors that determine your credit score (in the order of importance) are:

    1. Are your bills paid on time?
    2. How close you are to using up all the credit extended to you (approved credit lines)
    3. How often you request credit (the more you do it the worse your score is)
    4. The types of debt you have (secured like a mortgage or unsecured like credit card debt)
    5. How long you have had credit from each company you borrow from

What does all this mean? To summarize, you more you have established credit relationships that you have been paying off on time without constantly applying for new credit cards, the better off your score will be.

Treat your credit cards like a any relationship you want in your life, namely:

  • Long lasting and consistent
  • Steady and reliable
  • Loyal
  • Your credit score will affect your entire financial life including your debt accumulation so take steps to improve it. After all there is no use in paying higher rates than the next guy if you don’t have to.