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How are Credit Scores Calculated?

 In the United States, there are three major credit reporting agencies (CRAs) - Equifax, Experian, and TransUnion - that collect and maintain information on your credit history. Each CRA uses a slightly different method to calculate your credit score, but they all consider similar factors, including:

  • Payment history: This accounts for a large portion of your credit score and reflects whether you have made your payments on time. Late or missed payments can have a negative impact on your credit score.

  • Credit utilization: This refers to the amount of credit you are using compared to the amount of credit available to you. Using a high percentage of your available credit can be a sign of financial strain and may hurt your credit score.

  • Credit history length: A longer credit history can be a positive factor in your credit score, as it shows that you have a track record of managing credit responsibly.

  • Credit mix: Having a diverse mix of credit accounts, such as a mortgage, a car loan, and a credit card, can be positive for your credit score.

  • New credit: Opening several new credit accounts in a short period of time can be a red flag to lenders and may lower your credit score.

The exact formula used to calculate your credit score is a closely guarded secret, as it is the intellectual property of the credit scoring company. However, it is generally accepted that the above factors are the most important in determining your credit score.
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