How Is My Credit Score Calculated?

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How Is My Credit Score Calculated?

Credit ratings are so essential in people’s financial life that it’s reasonable to ask how they’re computed.

The credit score, often known as a FICO score, is a proprietary instrument developed by FICO, previously known as the Fair Isaac Corporation. Although FICO is not the only sort of credit score available, it is one of the most often used assessments by lenders to assess the risk of doing business with a borrower. 1 Here’s a look at what FICO considers when calculating credit ratings.

Key Takeaways

  • The most important factor is a track record of timely payments.
  • The amount you owe is an important consideration.
  • You look excellent if you have unused credit.
  • Applying for new credit might reduce your credit score.

How Is a FICO Credit Score Calculated?

What does a credit score really mean? FICO does not release the algorithm for its proprietary credit score calculator, although it is known that the computation includes five primary components of variable relevance. These are the categories, along with their corresponding weights: 2

  • Payment history (35%)
  • Amount owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

All of these factors are included into your total score, which might vary from 300 to 850. It is not determined entirely by a single circumstance or experience. 3

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3 Important Credit Score Factors

How Each Category Factors In

Payment history

Payment history considers whether you have regularly and on time paid your credit cards. It also takes prior bankruptcies, collections, and delinquencies into account. It considers the extent of the issues, the time it took to address them, and the length of time since the problems first occurred. The more late payments you have in your credit history, the worse your credit score. 4

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Amount owed

The amount you now owe in relation to the credit you have available is the second most important factor. Credit scoring models believe that debtors who consistently spend up to or beyond their credit limit pose a risk. 5Lenders like credit utilization ratios (the proportion of available credit that you actually utilize) to be less than 30%. 6

Though this component of your credit score focuses on your current debt, it also considers the number of various accounts you have open as well as the sorts of accounts you have. A big quantity of debt from various sources will have a negative impact on your credit score. 5

Your credit score is simply one of several factors that a lender may evaluate, but it is an important one.

Length of credit history

The longer you have open and in good standing credit accounts, the better. Someone who has never been late with a payment in 20 years is a better bet than someone who has been on time for two years. 7

New credit

Also, frequent credit application implies financial stress, so every time you seek for credit, your credit score suffers little. Before establishing a new credit account, think about if the additional credit is worth the loss in your credit score. 8

Credit mix

Lenders like to see a healthy credit mix that demonstrates your ability to handle various forms of credit. If feasible, both revolving credit (credit cards, retail shop cards, gas station cards, and lines of credit) and installment credit (mortgages, vehicle loans, and school loans) should be included. 9

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What Isn’t Included

It is critical to note that your credit score solely represents the information on your credit report. Other information may be considered by your lender in its evaluation. 2 Your credit report does not include information such as your age, current salary, or duration of work. 10

However, your credit score is an important metric utilized by lending institutions. It is critical that you monitor your credit report. Because this is the foundation of your credit score, it is critical to examine it at least once a year and repair any inaccuracies. Furthermore, if you discover that your credit score is low and you want assistance in erasing any bad marks, credit repair businesses may be able to assist.

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