A look at how your credit score works

Credit scores determine everything from job positions, insurance premiums and most importantly, the interest rate assessed to your line of credit. Your credit score is your worth as a borrower and a way for banks to determine risk. A high credit score shows that you have paid your bills on time, and that you are in good standings with your current creditors. A low score shows that you are unlikely to repay your debts. A credit score is calculated several factors, race or gender do not play any role. Neither do things such as time length of employment or medical history.

Your credit score is calculated by the amount of debt you have, the types of debt, how often you have paid your bills timely, how much new credit you have been seeking and how long you have had credit.

The largest portion, 35% of your score, is based solely on your payment history. If you have paid on time without being late on payments, chances are good that you will possess a good credit score. Lenders like to see that you can pay them back in a timely manner, thus they give lower rates to people with good credit.

The next 30% is based on how much money you owe, also known as utilization, or the amount you have used of each line of credit. If you have spent $10,000 on a credit card with a $15,000 credit line, you are above a 50% utilization, therefore your score will be negatively affected. Creditors like to see that you can manage your credit lines, rather than be slave to them.

Another 15% of your score is dedicated to your credit lifespan, or how long you have had credit lines open. Keeping old credit cards open, even if you do not use them, helps boost this part of your score by raising the average age of your accounts.

The remaining 20% is split between the types of credit you have open and how much credit you’ve been seeking. Its good to have a portfolio of credit, such as a credit card, mortgage and a car loan. This shows that you have experience with debt. The bank also takes into consideration how many inquiries are on your credit report, if you are actively seeking credit, you probably are in a financial hardship. When this is the case, most often lenders will either not want to lend you money, or they will do so at a greatly increased interest rate.