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How are credit scores calculated ? How do credit scores play a role ?

  For most of us, our credit scores determine everything about our lives. They determine whether we get to get that new car or not, whether we get to get a house, how much interest we may pay on that house, or whether we can get loans when we hit a rough patch. Having a good credit score can change your life, and conversely, a bad one can ruin it. So how are these life defining financial scores actually calculated? Well, the first thing to discuss is that you don't have just one credit score. Rather, you have three main ones, Equifax, Experian, and TransUnion. Your score can vary minorly or even by 10s to 20 to 30 points between these three credit bureaus simply due to how they calculate the scores and what's reported to them, like missed payments. There's also an agency called FICO that provides credit scores as well as one called Vantage score. Each one of these credit agencies calculate their scores independently on their own scales and lenders like banks and choose which scores they want to consider to evaluate you. In general, the biggest factors that will affect your credit scores are the number of payments you have in your name, the type of accounts you have like auto loans or credit cards, how much credit you're using versus how much credit you have, how long you've had your credit for, and your payment history on all credit lines. The best way to think of credit scores are that there are numerical measures of how good of an idea it is to loan you money if you went to a bank and asked them for $50,000 in loans, they need some way to evaluate how likely you will be to pay them back other than yo, I'm good for it. Each of the different variables we mentioned has different weights depending upon the formula being used, the specifics of which are kept secret by each agency. That said, generally the most important factor that goes into calculating your credit score is payment history. As you can probably guess, looking back at how well you stayed on top of making payments is a pretty good indicator of how likely. You will be to make your payments on time in the future. If you apply for an auto loan, a lender might choose to weight your auto payment history higher than, say, your credit card history, stepping back for a moment to the formula for the overall score. While many agencies keep their exact formula secret, we can at least know the weight of each category in FICO scores, which generally carries over to the other scores since they make that data public. Payment history is weighted at 35%, followed by amounts owed at 30%. Then length of credit history is 15%, new credit is 10%, and credit mix is 10% as well. Your payment history is simple. Have you missed payments? If so, how many? For amounts owed, lenders will look at your debt to income ratio or the ratio of how much debt you pay off each month versus how much money you're bringing in. In general, you want to keep this ratio under 43% on the very high side. The lower you are, the better off you are length of credit. The new credit categories should be pretty self-explanatory. Do you have a good track record of managing money? Then have you recently started taking a bunch of new loans, signaling possible on responsible spending? Lastly, while not weighted that heavily, lenders do also want to see a good mix of accounts. Auto lenders will want to see you having managed an auto loan before credit. Lenders will want to see good credit card history and also see that other lenders have extended you credit through cards too. It's essentially a measure of. How alone am I in giving this person money? Have other people done it? And I guess if they have, then I'll do it too. Now that we grasp how these scores are calculated, or at least what goes into each score and how that information is weighted, we can understand the best way to improve credit. If you want to improve credit fast, or really just as fast as possible, you'll want to start with the high value categories, start making your payments on time, pay down your overall loans, and just start being responsible. With your credit, soon enough, your credit will start improving. Also, be sure to check your credit report for free on various websites. It will help you track your progress and ensure no one took out a loan in your name, so that's how the all important credit score is calculated. It can be an unclear process since companies keep a lot secret, but in general you'll set yourself up for success if you pay attention to all of the categories we've just mentioned. 

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