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How Is Your Credit Score Calculated

The truth is that we actually do not know exactly how your credit score is calculated because it is one of the most guarded algorithmic equations in the world. What we do know are some guidelines and some common trends learned from years of studying millions of credit reports. There are five main factors that will determine the overall score. Some factors are weighted more heavily and will have a greater influence on your actual score. Here are some guidelines:

Payment History & Late Payments: Your payment history and how many late payments are recorded on your credit will determine somewhere between 30 * 35 % or your overall score. This section takes a look at if you pay your bills on time or if they are late. If there are any late payments, it is taken into consideration how late those payments are. They can report as 30, 60, 90 or 120 days late. Each having a greater negative impact on your score. If the accounts been sent to a collection agency or a judgment lien filed against you, the score will decrease by an even greater amount. Bankruptcy will also have an adverse affect on the score. Chapter 7 will cause a larger drop in score than a Chapter 13. Conversely, the accounts that show no late payments will help increase the credit score. Scores will also continue to improve the further in the past the late payments occurred. Typically after 24 months, the negative impact of late payments drastically decreases.

Blend of Accounts: The overall combination of what type of credit accounts you have determine somewhere between 6-9% of your total credit score. Typically, the more even the blend of installment loans, mortgage loans and revolving loans the better your chances of having a higher score. Accounts that can have a negative affect on your score are store cards that typically have interest free periods such as furniture stores, clothing stores and electronic store. Since these accounts will never leave your credit history, they will never stop having a negative impact. It is better not to carry those types of credit.

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