How Credit Scores Are Calculated

The reason credit scores exist is to give lenders an idea of how likely it is that you will default on a loan.

The higher your score, the better. Conversely, the lower your score, the greater the chance you will default on a loan. Lenders use this information to decide whether or not to give you a loan and what interest rate to charge you.

But what criteria do credit reporting agencies use to determine your credit score? Let's look at How Credit Scores Are Calculated.

Payment History

First, the credit reporting agencies are going to take a look at your payment history. This criteria makes up around around 35 percent of the criteria they're going to look at.

Your payment history is your report card on what you've done with the loans that lenders have extended to date. They will look at credit cards, mortgage loans for any properties you own, lines of credit, installment loans, car loans, school loans, and others.

Credit Utilization Ratio

Next, they'll look at how much credit you've used versus your credit limit. This is referred to as your credit utilization ratio and it accounts for around 30 percent of the criteria.

It's important to keep this number low, because it shows that you're not maxing out your credit cards or lines of credit, and shows responsible use.

Amount of Time Credit Accounts Have Been Open

Another thing they will look at is how long your credit accounts have been open, and this accounts for around 15 percent of the criteria. Older accounts that were used, and not abused, show reliability over time.

You can see why mortgage lenders want to know this information: They are providing you with a pretty hefty amount of money, so they need to know your track record.

Recent accounts are going to be looked at too: If you're opening a bunch in a short time frame, that raises red flags and my negatively impact your credit score.

Public Records

Next in the mix is public records, which hit 10 percent of the credit score criteria. Anyone who's gone bankrupt or had difficulties with debt collection or other negative public records may be rated as high-risk. These types of events can cause your credit score to take a huge hit.

Inquiries / Hard Pulls

Finally, there are inquiries, or "hard pulls" on your credit file, and they count for another 10 percent of the credit score criteria.

You can personally check your credit score and credit file without it harming your numbers. Only inquiries that are related to active credit seeking will impact your credit score, so if you want to get your credit score, don't hesitate.