How Your Credit Rating is Calculated

The 3 main credit reporting bureaus are Experian, Equifax, and TransUnion. There are lots of variables and the particulars of your situation may change the balance of the calculation a small bit but, on average, this is the breakdown of what factors figure into your credit rating.

Payment History 35%

Total Debt 30%

Length of Credit History 15%

New Credit Applications 10%

Types of Credit Used 10%

Your credit score carries a lot of weight but according to a recent survey, 75% of Americans do not know their credit score and almost 20% have never seen their own personal credit report. These numbers are staggering considering the impact that their score has on their daily lives.

Your credit rating affects everything that you do money-wise. When applying for any type of credit, lenders use your credit rating to determine if you get approved for credit, how quickly you get approved, your credit limit, and the interest rate that will be applied to the money that you borrow.

But How Does Having Multiple Credit Cards Hurt My Rating?

Multiple credit cards can hurt your credit rating if your balance exceeds 30% of your available limit on one or more of your credit cards. When credit bureaus calculate your credit score, one of the key figures that they look at is your balance-to-credit-limit ratio. If your credit card balance exceeds 30% of your total credit limit, thats a red flag to the bureaus that you may be reckless with your spending, and an increased risk to default on the money borrowed.

For example, lets say that you have $8300 in credit card debt spread out over 5 different credit cards with an average credit limit of $2500 on each card. That means that you have a credit limit of $12,500 but you have used $8300 of it, which means that you have used about 66% of your available limit.

Credit reporting agencies have to play the averages. For you, $8300 might not seem like reckless spending but, on average, people that exceed 30% of their available limits tend to have a higher rate of default. That is how multiple cards can hurt your rating, even if you are careful about paying your bills on time.

Should I Close the Credit Card Accounts that I Rarely Use?

Probably not. Even though you may not have used an old department store account in years, the credit limit on that card still figures into your total amount of available credit. If you close it, your percentage of debt to available credit may increase, thereby making you a higher risk in the eyes of the credit bureaus.

If you do choose to close an account, have the creditor report to the agency that the account was closed at your request. When an account is closed, the credit bureaus generally assume that the account was closed by the lender, which negatively affects your credit rating.