How Bureaus Calculate Your Credit Score

There are three bureaus responsible for calculating your credit score. These bureaus, Experian, TransUnion and Equifax, are nationally recognized. When a creditor runs a credit check, he or she is looking at your score with one or all of these bureaus. Similarly, when a creditor reports you for a credit problem, this is where the report will be sent. The process for calculating a score is very complicated, but there are some basic factors used by all bureaus that are easy to understand.

Length of Credit History

If you have never taken a loan, you will not have any credit. This is a very unfortunate problem for many young people. When you first try to secure a loan, you will likely need to use a cosigner. Only once a few cosigned loans are paid off do you even secure a modest credit score. You will need to have a consistently reported credit score for about 5 years to be able to get into the lower risk categories. Until then, even if you make every payment, your score will still be low due to insufficient data.

Previous Debt Payment Record

The biggest factor considered is how you have performed on your past debt. A record of each debt payment you made for at least 2 years is likely shown. Any missed payments will drop your score slightly. This drop is made larger if a payment goes 30, 60 or 90 days past due. If you have defaulted on a loan, this will drastically reduce your score.

Types of Credit

You will have both installment debt and revolving debt in your lifetime. Installment debt is distributed as one large amount paid off through monthly payments, called installments. Revolving debt is like a credit card: a limit is issued, and you can spend up to this limit and then pay back the funds as you wish. You should show a mix of forms of debt, especially including high-limit installment loans, in order to boost your credit score to the highest possible rating.

Percentage of Credit Being Used

Of your total revolving credit limits at any given point, you should only maintain a 10% balance. For example, if you have 2 credit cards each with a $5,000 limit, then you should have no more than a combined $1,000 limit. This shows a lender you are not approaching your limit on all of your credit cards, which can be a sign of financial weakness. Credit bureaus will factor this in, and paying down your debt can boost your score.

Standing Current Debt

The total amount of debt you have to your name will be considered. However, this amount is not considered in a bubble. It is compared to your relative ability to pay the debt as shown through consistent payments. The credit bureaus do not receive a report of your income, so they cannot use this as an estimate of your ability to pay. If you make all of your debt payments, the bureaus will use this as the mark of your ability.

How do you calculate your combined credit scores?

Your combined credit scores represent the individual scores on file under your name at the three main credit bureaus: Experian, TransUnion and Equifax. No single agency is in charge of combining these scores, so it is up to each lender to combine the scores as it chooses. Some lenders will simply average the three scores, which are typically very similar, to determine your combined score. Other lenders will compile a credit report taking into account details from all three reports and then determine a score based on their own formulae. In any case, your combined score should be very close to your individual score at any one bureau.

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