How is a credit score calculated and why it's important?

There are several different credit scoring models, but the most widely used is the FICO score. The FICO score generally ranges from 300 to 850, and it is calculated using the following factors:

1.    Payment history: This accounts for 35% of the FICO score and includes information about whether the person has made their credit payments on time. Late payments can hurt the score, while a history of on-time payments can improve it.

2.    Credit utilization and amount owed: This accounts for 30% of the FICO score and measures how much of the person's available credit they are using. Higher credit utilization can hurt the score, while lower credit utilization can improve it. A good utilization rate is less than 10% and a utilization rate over 30% is a negative.

3.    Length of credit history: This accounts for 15% of the FICO score and measures how long the person has been using credit. A longer credit history can improve the score, while a shorter credit history can hurt it.

4.    Credit mix: This accounts for 10% of the FICO score and measures the types of credit the person has, such as credit cards, mortgages, and personal loans. A mix of credit types can improve the score, while having only one type of credit can hurt it.

5.    New credit: This accounts for 10% of the FICO score and measures how many new credit accounts the person has opened recently. Opening too many new credit accounts in a short period of time can hurt the score. Even applying for new credit can hurt your credit score. However, multiple so-called inquiries in a short period of time will generally count as one credit inquiry (though multiple applications for credit cards are an exception and can hurt your credit score more). 

For more information on credit scores click here. 

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