Calculating a Credit Score

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We have all heard the saying “credit is king.” That three-digit number can be the difference between being able to buy a house or not, affording the car you want, or even getting a job. But what makes up a credit score?  How do we keep our credit score in good standing? Well, there are a few factors…

Payment History

This is the most important factor to keep in mind when thinking of credit payments. Are you making monthly payments on time? Are you missing payments or not paying at all? This is a major factor in the calculation of your credit score. Did you know that late payments can stay on your credit report for seven years? Seven. Luckily, resolving the issue is simple: make your payments!


Similar in meaning to your “credit utilization ratio”, capacity is the measurement of how much credit you have available, or have not used, compared to your total available lines of credit (credit cards, overdraft lines, home equity lines, etc.). For example, if your credit limit is $5,000 and you spend $1,100, your capacity is 78% ((5,000 - 1,100)/5,000).  The higher your capacity, the higher your score will be.  It tells lenders that you are responsible with your credit and aren’t overextending yourself. The ideal ratio is 70% or higher.

Debt-to-Credit Ratio

Also called credit utilization ratio, debt-to-credit ratio is the measurement of how much credit you’re using compared to your total available credit. For example: If your credit limit is $5,000 and you spend $1,100, your credit to debt-to-credit ratio is 22% (1,100/5,000). Keeping this ratio low is key. It tells lenders that you are responsible with your credit and you’re not overstretching yourself. The ideal ratio is 30% or lower.

Credit Length

The longer your credit history, the better. Always keep your first credit card open. When your card is closed and your credit history is shortened, it can have a significant impact on your credit score and impact the chance of getting a loan.

Types of Credit

Having a variety of credit sources is conducive to a positive credit score. There are three types of credit in a credit bureau scoring model: revolving (credit and charge cards), installment credit (loans), and mortgages. Overall, the average person will naturally earn a variety of credit types over the years.

Credit Pulls

While a soft inquiry doesn’t affect your credit score, hard inquiries can cause a temporary dip. A rule of thumb is to only apply for credit when absolutely necessary. How do you know if it is a soft pull or hard pull? A hard pull is typically when a financial institution is doing the inquiry, like a lender or credit card issuer. A soft pull is often done when your credit is checked as part of a background check. An employer may do a soft pull before hiring you, as well. Many times your permission will be asked to conduct a hard inquiry, but not always. Keep these five items in mind while trying to boost that credit score, and you should be the master of your domain in no time. Interested in applying for a credit card? Learn more about our Experience Michigan First Rewards® Visa® here.

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