DebtWave Credit Counseling Offers Assistance on Understanding How a Credit Score is Calculated

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Financial literacy allows individuals to make better financial decisions, which can increase wealth in the long run. Having an understanding of a credit score can put an individual in a better position to qualify for favorable loans. DebtWave Credit Counseling breaks down how a credit score is calculated.

According to the Securities and Exchange Commission, 43% of adults at the lowest level of financial literacy live in poverty, compared to only 4% of those at the highest level of financial literacy.

DebtWave Credit Counseling is attempting to improve those numbers by providing free financial education. Individuals that don’t live in San Diego County will still be able to take advantage of the web seminars, financial literature, and phone consultations.

DebtWave Credit Counseling is a non-profit 501(c) 3 organization that provides personal-finance education and counseling nationwide. This type of service is essential, especially in a time when an individuals’ financial knowledge is often directly related to their financial stability. Since an individual’s credit score will determine what kind of rates and loans they’ll qualify for; having an understanding of how the credit scoring system works is important.

A credit score is a number based on the information in a person’s credit file that shows how likely they are to pay a loan back on time – the higher their score, the less risk they represent. The credit score that most lenders use is called a FICO® score. A FICO score helps a lender determine whether an individual qualifies for a loan and what interest rate they’ll pay.

Payment history makes up about 35% of a credit score. Although a person’s entire payment history is important, the last 2 years is the most important. So paying bills on time should be the highest priority. The frequency and severity of late payments is also important. For instance a person that’s been late only once or twice is judged less harshly than someone who has been late 10 times. Severity alludes to how late the payment was, 30 days as opposed to 120 days.

The total amount of debt makes up about 30% of a score. People who max out their cards or even come close, have a much higher rate of default than people who keep their credit use under control. When it comes to revolving debt, the credit formula looks at the difference between the credit limits and balance. The bigger the gap between the two, the better. For an installment loan, the score considers how much is owed as compared to what was originally borrowed. For instance paying down balances over time tends to help a score.

How long someone’s had credit is 15% of their total score. Typically the longer that they’ve had credit the better, but it is possible to have a good score even with a short history. The score considers the age of the oldest account and the average age of all the accounts. A common mistake that people make is to close an account that they have had for many years because of inactivity or undesirable terms. An individual would be better off leaving the account open (and using it on occasion) to preserve their credit history.

The last application for credit is 10% of a total score. Opening new accounts can lower a credit score, particularly if there have been many applications for credit in a short period of time while having a short credit history. Scoring factors include: The number of accounts applied for recently. The number of new accounts opened. The amount of time that has passed since the last applied for credit. The amount of time that has passed since the account was opened.

The type of credit used is also 10% of a credit score. The FICO scoring formula is looking for a “healthy mix” of credit, unfortunately they are vague on what exactly that is. An individual doesn’t need to have a loan in each possible category (credit card, mortgage, auto loan, and so on) to have a good score. To get the highest score possible, however, one needs to have both revolving and installment credit. People should not obtain credit that they don’t need in an attempt to improve their score because that could have an adverse affect in the long run.

“Many individuals I’ve counseled don’t have a thorough understanding of how the credit scoring systems works,” said Amie Schmidt, Sales Manager and Senior Credit Counselor for DebtWave Credit Counseling. “They tend to focus on only one factor, such as payment history, and assume this will result in a good credit score.”

For additional information about this subject, contact Jason Cash or visit under the education tab.

About DebtWave Credit Counseling

DebtWave Credit Counseling is a 501(c) 3 Non profit organization committed to educating individuals on the proper use of credit through budget management, to offer sound counseling and to assist clients to reduce and eliminate debt. DebtWave is a member of the Better Business Bureau and the American Association of Debt Management Organizations.


Jason Cash, Director of Education

DebtWave Credit Counseling

(888) 285-7624 ext.150

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