A credit score is calculated by considering various factors related to a person’s credit history, payment behavior, and the way you already use your credit. The exact algorithm used to calculate credit scores may differ slightly between credit reporting agencies, but generally, the following factors are taken into account:
- Payment History: This accounts for the largest portion of a credit score and considers whether payments on credit accounts have been made on time, the frequency and severity of missed payments, and how recent they were.
- Credit Utilization: This refers to the percentage of available credit that has been utilized, and high utilization can negatively impact a credit score.
- Length of Credit History: The length of time a person has had credit accounts is also factored in, with longer credit histories generally indicating a more stable credit profile.
- Types of Credit: The types of credit accounts a person has, such as credit cards, mortgages, auto loans, etc., are also considered. Having a mix of credit types is usually viewed positively.
- Recent Credit Inquiries: The number of times a person’s credit report has been accessed by potential lenders or credit providers in the recent past can also impact credit scores.
Based on these factors, a credit score is generated, with scores ranging from 300 to 850. Higher credit scores generally indicate a more favorable credit profile and may lead to better access to credit with more favorable terms and interest rates.
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