How is the Credit Score Calculated?

Dec 14, 2022 at 7:00am
How is the Credit Score Calculated?

Have you ever found yourself thinking: What is a Credit Score, and how is it calculated? Your Credit Score confirms that you are in good standing financially, and therefore, it is an expression of your credit worthiness. Your loan application for a major project, like a home loan or a car, starts with a Credit Score.

What is a Credit Score based on?

Your Credit Score is based on your continuous personal financial spending track record or how you pay your retail accounts, credit cards, your mortgage, etc, over an extended period. Lenders use Credit Scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Credit scoring is not limited to lenders and banks - mobile phone, and insurance companies, landlords, and government departments use the same method to determine your credit worthiness.

What does a Credit Score look like and how is it calculated?

It is usually a three-digit number ranging between 300 to 850. The five key categories used to calculate or determine your Credit Score, according to an article by Wells Fargo, are:

  • Payment history = 35%,

  • Amount owed = 30%,

  • Length of credit history = 15%

  • Credit mix = 10%,

  • New credit = 10%

When you understand what impacts your Credit Score, you can take steps to improve it. In the previous blog we discussed the importance of Financial Literacy. A good Credit Score starts with having great Financial Literacy Skills.

Author: Mpume Nyandu - Director: Stakeholder Relations at HPP Cares (CDE)

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Look out for our next Blog on: How to Improve Your Credit Score

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HPP CARES CDE's accomplishments these past few years have been significant and all-encompassing; striving to advocate under the National Coalition for Equities’ umbrella to maintain a powerful community voice among the Federal and State regulators and major private sector corporations to address public policy issues, and to focus on the wealth & income inequality affecting affordable homeownership and small business growth. With the NCFE, HPP CARES CDE’s outreach efforts have led to an increase in corporate social responsibility and consumer protection. We have been able to reach more people, collaborate with more companies, meet with more regulators, all in the name of helping deserving individuals become sustainable homebuyers, successful small business owners, protected consumers and empowering California communities. HPP CARES CDE is at the forefront of helping people of color become partners in our mission to reduce income and wealth inequality and build stronger futures for all minority groups.