If your like most “normal” people your credit score is a bit of a mystery, and how lenders come up with that magical number is even more of a mystery. I can try to help you understand some of the factors which calculate your score. We have a better chance of having unicorn for dinner than we do of finding out the exact formula to calculate a credit score.

I remember the first time I had heard the term credit score. I was about 17 years old trying to get a loan for my first car. I am sure you can all relate that nervous feeling of asking for your first loan.. Once I filled out the application I went from about a 5 on the nervous scale to a 9.2. The loan officer started to look at the paper and said we need to pull your credit and have a look at your credit score. Credit score?? What was that? I had never heard of a credit score, and I had no idea how to get one. I am sure I looked like a deer in headlights. At this point my fight of flight instinct had kicked in and I was not sure if I should run out the door, or jump across the desk and start punching the loan officer. Lucky for him just when I was about to pounce he said I was approved, and I could have the loan. From that point on for the safety of future loan officers, I thought I should find out what this “credit score” was all about.

So what is a credit score?

History -

The credit scoring system became prevalent during the 1980’s as a way for lenders to quickly evaluate a potential borrower’s creditworthiness. The system was found to accurately predict financial risk over time and grew to several different industries. Now credit scoring is used by lenders, insurers, landlords, employers, utility companies and even judges to evaluate your credit behavior.

How a score is calculated -

Thousands of different credit scoring formulas exist today for various evaluation purposes. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses, but they should be in the same range.

The basic credit scoring formula takes into account several factors from your credit report. The impact of each element fluctuates based on your own credit profile:

Payment history - A good record of on-time payments will help boost your credit score.

Outstanding debt - Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.

Credit account history - An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application. Closing accounts can throw off your credit to debt ratio.

Credit to debt ratio. You score can be influence by how much credit you have and how much credit your using. A healthy load is about 30% of your available unsecured credit. (Credit cards, signature loans, etc.)

Recent inquiries - When a lender or business checks your credit, it causes a hard inquiry and a slight ding to your credit score. Apply for new credit in moderation. There are 2 types of inquiries, hard and soft. A hard when a lender pulls your credit, a soft is when you pull your credit. There is no penalty for soft inquiries, you should pull your credit often, and check for your report for accuracy.

Types of credit - A healthy credit profile has a balanced mix of secured loans and unsecured loans.

The above list is some of the major factors included in calculating your credit score. There are many other factors, but like I said above, we will be feasting on unicorn before they release everything that goes into a credit score.

Ken runs http://www.creditreportcoach.com which is dedicated to helping consumers become educated about all things credit.

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