How Are Credit Scores Calculated?

Though it may not seem like it, our lives are constantly governed by one thing--our credit score. A few simple numbers decide whether you get approved for things like credit cards and bank loans, and decide just how much interest you're going to pay. A high number means a lifetime of low interest rates and large limits. A low number can mean trouble. This poses the question: How exactly are rates calculated? Thankfully, the answer is a simple one.

Instructions

1

Understand what is taken into consideration when your credit score is calculated. The frequency at which you pay your bills is a big one. These go from car insurance to mortgage payments to credit cards and everything in between. Also taken into consideration is how much credit you have available.

2

Know how the credit bureaus use this information to calculate your score. The three major credit bureaus all take the information listed in step one and plug it into a mathematical equation and get your scores. These three scores are then averaged together--this is the score a potential lender sees when you apply for a credit card or loan.

3

Not paying your bills on time is certainly a way to lower your credit score over time. Having accounts that have been turned over to collection agencies is also extremely bad. Declaring bankruptcy is the worst thing you can do to your credit score--it will ruin your credit history for up to seven years.