How is Credit Score Calculated?

We’ll be in the market for our first home in the next year or so. For that reason, my mind has been on credit scores quite a bit lately. I don’t want to pay more than I have to for our mortgage (planning on a 15-year fixed, if you were wondering).

I found this article on MSN direct, and pretty informative and thought I’d pass on a summary of it to YNAB readers.

There are a few things one can easily do to optimize a credit score. However, as I’ve mentioned before, we shouldn’t obsess about it. Time may be better spent reading and learning more, networking, starting a side business, etc.

I found the breakdown of variables in the credit score extremely useful:

Payment History35%
Length of Credit History15%
New Credit10%
Types of Credit Used10%

 As mentioned in the article, it doesn’t matter how much income you make. (Though the amount of credit you’re given does, to an extent, depend on your income. A higher credit limit will lower your utilization and thus, raise your credit score).

It’s smart to monitor your credit score every four months from one of the three bureaus (Equifax, Experian, and Transunion). When you stagger checking your credit report and score, you get to see what it’s looking like over the course of a year, instead of just at one time. This will help protect you further from identity theft, mistakes, etc. You can see the scores that lenders most likely see by going to myfico.

And finally, from the article, a couple of (fairly obvious) things you can do to make sure your credit score is maximized:

  • Pay all bills on time.
  • Think twice before closing accounts.
  • Minimize credit card applications.
  • Keep balances low.

Keep in mind that you should probably not be using credit cards if you can’t answer yes to my six requirements before using a credit card.