Most people understand that you need to have a good credit score to buy things in the United States, but not many of us know who calculates that credit score or how they calculate it. It's almost like taking an exam without knowing what the questions are and who will score them. When you look at it that way, it seems really unfair, however this is the credit system we all deal with every day. This article and many of the others in the Money section of the Survival Guide will try to shed some light on the mysteries of credit rating and management.

Before going too deep, we need to clear up the first and biggest mistake presented by corporate America: every person has a credit score. No person has a single credit score. When people talk about their credit score, they are actually talking about 3 primary scores that come from 3 separate credit rating agencies (Equifax, Experian, and TransUnion).

Each of these credit rating agencies uses a slightly different rating method to calculate your credit rating, but each of the 3 rating forms is created by 1 company: The Fair Isaac Corporation (FICO). I don't know why each of these rating agencies uses a slightly different algorithm, but based on that, your score is almost certainly different for each agency. Also, not everything is reported to each of the 3 agencies. A collection that appears in Equifax may not even appear in TransUnion or Experian. For these (and other) reasons, your score can vary greatly between agencies.

Even though each agency has a slightly different score, the 3 of them follow the same percentage breakdown to calculate their score between 350 (mom wouldn't loan her money) and 850 (qualify for any card they want).

35% - Payment history. This is most important and covers the number of late payments you have (hopefully none) and / or cancellations (when you stopped paying your card and default). In general, if you can keep this at 1 late payment per year, you will get all of these points.

30% - Outstanding debt. This covers the amount of credit card you have as a percentage of the total available credit. For example, if you have a credit card with a limit of $ 1,000 and have a balance of $ 300, your debt ratio is 30% (which is good). If you can keep this ratio below 30% you will get most (if not all) of these points

15% - Duration of credit history. How long you have had credit is important and longer is better. Don't cancel your old credit cards (even if you don't use them anymore) because it will really hurt your score.

10% - Credit mix. The combination of auto loans, mortgage payments, and credit cards is used as a factor in calculating your score. A healthy combination of these is considered better, and anyone with a mortgage (paid on time every month) will generally get a higher score.

10% - Queries. Every time a company checks your credit to see if they should give you your credit card or sell your car, they are creating a query. Too many inquiries in a short period of time will affect your score as credit bureaus perceive you may be in trouble and need credit.

Author's Bio: 

Most people understand that you need to have a good credit score to buy things in the United States,