What Goes Into Calculating Your Credit Score?
Written by: Kristy Welsh
Last Updated: September 25, 2017
A credit score represents a person's creditworthiness and this score is used by just about all lending institutions to determine whether or not they are going to lend you money to buy a house, a car, or issue you a credit card. Your credit score is based on your credit history and your credit history is compiled by the credit bureaus. The three main credit bureaus are Experian, Equifax, and TransUnion. These bureaus, or credit reporting agencies, obtain your credit history from a variety of sources and they organize it into an easy to read report.
What's in Your Credit Score?
That is a great question and one that is not so easy to explain. FICO is one statistical method to come up with a score and so is VantageScore. Both of these programs use all of your data, put it into a program to analyze the data, and out comes a number. The exact computation is a highly guarded secret but we do know what items go into arriving at your score. According to the FICO website, here are the percentages of importance of each of the following categories which are used to determine your FICO Score:
- Payment History — 35%
- Amounts Owed — 30%
- Length of Credit History — 15%
- New Credit — 10%
- Types of Credit Used — 10%
Your FICO Score takes into consideration ALL of the above categories, no one piece of information or factor alone will determine your score. Keep in mind lenders look at more than just your score. They are able to weigh other factors, such as income and job stability, when evaluating you as a credit risk.
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Your credit report will contain all account payment information such as the type of account, number of timely or late payments, delinquencies, past due items and number of accounts paid as agreed.
This portion of your credit history shows amounts you owe on open accounts, number of accounts with balances, proportion of credit lines used, and proportion of installment loans still owing. This data is used to determine if your accounts are maxed out or if you are able to keep your accounts with low or no balances.
Length of Credit History
When reviewing the accounts you have open, certain weight is given to the time since you opened the account and how much time has lapsed since you had any activity on a certain account. In other words, the longer you have a credit card account open and they can see you have used it recently, the better it bodes for your credit score.
Types of Credit Used
This factor may not carry a lot of weight percentage-wise, but it is an important factor when determining your credit score. Do you have a lot of different types of accounts such as revolving, installment, mortgage, or other consumer finance accounts? They more diverse your account portfolio, the better.
What Makes a Good Credit Score?
If you want to see approximations of how much weight certain factors are given in comparison to others, read our article on Credit Scores and What Influences Them.
From the TransUnion's website, these are the kinds of "trades" (types of credit listed on your credit report) that go into a perfect credit score:
- A few (say, 3 or 4) revolving credit cards, each with very high lines of credit ($10,000+), and very low carried balances on only 1 (or maybe 2) of them at a time.
- At least one charge card, such as American Express, Diners Club, etc.
- All trade lines at least 6 months old, and at least 1 more than 3 years old.
- No derogatory notations.
- Very few inquiries — no more than 1 to 3 in a six month period.
- At least one installment trade line in good standing, i.e., a mortgage, auto loan, or student loan.
As you can see, it takes a diverse and negative free credit history to be able to achieve a high credit score. Don't feel defeated, you can raise your credit score by addressing each one of the contributing factors and making sure to clean up any negative or late payments. Start to pay your accounts on time and make sure to keep low balances on them. Diversify and maybe consolidate some accounts so you don't spread yourself too thin. With some work, you can have an excellent credit score and reap the benefits of low interest rates and money saved!