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Day 5: Credit Score Calculations

Today’s Easy Financial Task: Learn how your credit score is calculated.

How to rock this task:

  1. Learn how your credit score is calculated

Woot, woot! Day 5, friends!

Today’s an important day. We’re diving into the factors that affect your credit score.

In total, there are five areas of your credit history that are used to calculate your credit score. Some components are more impactful to your score than others.

What’s the purpose of this task?

In order to increase your credit score, you will need to identify the factors from your credit history that are hurting your score so you can make improvements.

So, let’s get started!

The five factors used to calculate your credit score include:

  • Payment history: 35% of your score

  • Amounts owed: 30% of your score

  • Length of credit history: 15% of your score

  • Type of debt: 10% of your score

  • Inquiries: 10% of your score

Let’s break down the importance of each one:

Payment History (35% of Your Score)

Of all of the components, this one is the most influential. Your ability to pay your current bills on time is a good indicator of whether you’ll be able to pay bills on time in the future. Late payments make you appear less creditworthy and, as a result, can do quite a bit of damage to your score.

Amounts Owed (30% of Your Score)

Amounts owed is how much debt you’re carrying. Having a high amount of debt owed could mean you’re having trouble paying your bills and is another red flag for companies measuring your creditworthiness.  

There are three key factors that go into determining your mark in the amounts owed category including your credit utilization, amounts owed on installment loans, and overall balances.

Let’s discuss each one in detail:

Credit Utilization

Your credit utilization is how much credit you’re using on revolving accounts. Revolving accounts are credit lines that you can keep a revolving balance on from month-to-month like your credit card. To calculate your utilization, you:

  • Add up the credit limits on your accounts

  • Add up the balances on your accounts

  • Divide your balance by your credit limit

  • Multiply by 100

For example, if you have a credit card limit of $1,000 and your balance is $500, you’re utilizing 50% of your available revolving credit.

Here’s another example: Say you have two credit cards and each one has a $1,000 credit limit (that’s a $2,000 credit limit in total). If one card is maxed out with a $1,000 balance and the other one has a zero balance, your credit utilization is also 50%.

Your goal is to keep utilization at 30%, but even lower is better.

How Much You Owe On Installment Loans

An installment loan is a loan that has a set amount of payments and a set loan term. Examples include your mortgage and auto loans. Having less owed on your installment loans has a positive effect on your amounts owed.

How Many Revolving Accounts You Have With Balances or Have Maxed Out

Finally, the amount of revolving accounts (i.e. credit cards) that you have with a balance, or have maxed out the credit limit, will have an impact on your mark in the amounts owed category.

Length of Credit History (15% of Your Score)

The longer your credit history, the better. Your credit card history is calculated using an average.

Here’s an example: If you’ve had a mortgage for 15 years, a credit card for 10 years, and another credit card for two years, the length of your credit history equals nine years.

Keep this in mind before you close any of your accounts. Even if you pay off an account, closing it can significantly shorten your average history.

You also want to be careful of adding new accounts. From our example, you can see how the card that’s only two years old has shortened the average history length. The average credit history would be three and a half years longer without that credit card.

Installment loans are treated differently than your revolving credit (i.e. credit cards). When you pay off a loan, the account is closed and no longer appears on your credit.

Type of Debt (10% of Your Score)

We’ve touched on the many types of debt you can have so far. A few examples being: credit cards, mortgages, auto loans, and personal loans.

Having a mix of accounts that are in good standing shows that you can manage various forms of debt responsibly - which can have a positive impact on your score.

Credit Inquiries (10% of Your Score)

A credit inquiry is when someone you authorize to look up your credit does a credit check. Too many credit inquiries can ding your credit score a few points and stay on your report for two years. Be cautious with who you allow to check your report.

It’s Time for Review

Now that we’ve covered the five components of your score, dig into your credit report(s) to see where you stand with each one.

Take out a highlighter or pen and note the positive and negative. We’ll circle back on how you can make improvements in the areas you circle next week.

That’s all for Day 5, Dream Catchers!

Tomorrow is a day to review the tasks from the last five days. Starting next week, we're getting to WORK! This week was all about Credit Knowledge. Next week is all about Credit Improvement. Get ready to take action. 🙂

Leave a comment below or reach out to your accountability partners if you have any questions. Don’t forget to check into the Dream Catchers: LIVE RICHER group as well.

Share what you’ve learned today with your social media friends and tag me @thebudgetnista

Live richer,


P.S. Don’t forget to get your free Live Richer Challenge: Credit Edition Starter Kit. Get it here.

P.P.S. Here’s a copy of the Challenge Calendar. It’s a fun way to keep track of your progress.

You can also reach out to me here:

My Lisa Rule: I have 4 sisters and Lisa is the baby (well she’s not a baby anymore). Of all of my sisters, I’m the most protective over her. Before I share any product or service with you, it must pass my Lisa Rule.

What’s the Lisa Rule? If I would not advise Lisa to use a product or service, I won’t advise you to either. YOU are my Lisa's. I feel protective over you and your financial journey.

The products and services I recommend pass my Lisa Rule. Yes, I may be an affiliate or partner and earn a commission off of referrals or income, but I would not recommend a product or service that I didn’t believe was helpful and useful.

Share the wealth!

  • How can I get my credit report I pulled it out but didn’t print
    Anyone knows if they will mail it or is just digital?

    • Hi Milagros, you should be able to log back in and review the report, save it via PDF. Also, you may even email it to yourself as an attachment.

    • Good question Natasha. I almost signed up with National Debt Management last week Friday…but I talked myself out of it. I thought let me go through the challenge first. Also a key factor for my decision of putting NDM on ice is there is a onboarding period that takes place and while their negotiating to lower your rates…your creditors are not being paid. During this period your creditors may start to call about non payment. The thought of me being called for non payment was a BIG factor in my decision not to go with a debt management program.

  • To be honest I was uncomfortable looking at my credit reports and score because they’re fair to poor. But the more I’m tasked to look at them this week, the less fearful I am, because as the saying goes “You can’t fix what you won’t face.”

    • Absolutely, Kristina; I have a new mindset this year. I am going to take care of business first and see the results of my hard work later.

  • I’ve checked out my report, I realized I am utilizing 59% of my revolving credit, which is no good… my goal in to work on bringing that down

  • For now lets just say my numbers really need help, but what I will say is that I definitely have some serious work to do! But hey, that’s why I’m here right???

  • # My credit score 640 fair . On Jan 13 my credit utilization increase to 34%recently.
    I’m enjoying the snowball method and practicing paying my bills on time.#

  • I have learned more here today than I realized I did not know. I have struggled for years wondering why my credit score just lagged or would drop a few points when I paid all my bills on time but now I have a better understanding of things that could have contributed somewhat. I can’t wait to learn how to fix it.

  • I just checked my score and it went down 3 points from 801 to 798 because my utilization went from .3 to 1.01%. You would think it wouldn’t move but I have learned there are small fluctuations from time to time so I don’t get too frustrated. However, I opened another credit card and because I have stayed the course, my line of credit is the biggest one yet and this should boost my credit limit tremendously and I am expecting my score to jump like “Jordan” here real soon! So stay the course ladies. I just wish I had learned what I know now long ago.

  • How to get loans I paid off in the past of my credit report is important and removing a loan off my account that I cosigned for but had no responsibility to make the payments.

  • Question, when calculating my credit score do closed accounts have an effect? It sounded like closed accounts will still appear on my credit report but they won’t affect my credit score. Is that correct?

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