How is a Credit Score Calculated?

How Is a Credit Score Calculated?
The most widely used credit scores are based on the Fair Isaac & Co. (FICO) credit scoring model. FICO develops credit scores based solely on information contained in credit reports; it compares the information contained in a consumer's credit report to the patterns of information contained in thousands of other credit reports, and calculates a credit score that predicts the level of future credit risk for a particular consumer.

While FICO is the most well known type of credit score, it’s not the only one out there – some check approval services also develop risk models and scoring that are based on check writing patterns in order to predict the risk of a particular check being returned. You may also have more than one FICO score as each of the three major credit reporting agencies collect and report information in slightly different ways; since your credit score from each agency only uses the information contained in that agency's report, it’s possible to have three different scores.

What Factors Influence the Credit Score?
Your credit score takes all factors into consideration; no one piece of information or one factor will determine your score, although some factors are weighted more heavily than others.

• Payment History – Your payment history determines approximately 35% of your total credit score. This factor looks at whether you pay your bills on time, or late. If they're late, how late are they? How often do you pay late? How recent are your late payments? How many accounts show no late payments? Have you had accounts turned over to collection or a judgment entered against you? Have you filed for Bankruptcy?
• Amount Owed – How much you currently owe determines approximately 30% of your total credit score. This factor looks at the total amount you owe, and on what types of accounts. How many accounts have balances? How much of the total credit line is owed? How much is owed now in relation to how much you borrowed originally (i.e. for auto loans)?
• Length of Credit History – The length of your credit history determines approximately 15% of your total credit score. In general, a longer credit history will increase your score. This factor also looks at how long you’ve had certain credit accounts, and how long it’s been since you used certain accounts.

• New Credit – Approximately 10% of your credit score is based on how many new accounts you’ve established. This factor looks at how many new accounts you have, how long it’s been since you opened them, how many recent requests for credit you have made, and the length of time since credit report inquiries were made by potential lenders. Rate shopping should not affect this factor because the inquiries will be made for a particular type of credit during a short period of time.
• Overall Credit Mix – Approximately 10% of your credit score is based on the overall mix of credit cares, installment loans, mortgage loans, etc. The more balanced the mix, the more likely this factor is to improve your overall score.

Checking Your Credit Score
You can order your credit score, for a fee, through any of the three major credit reporting agencies, or through various online services, including MyFico.com, which offer to get your report and score from each of the three credit reporting agencies for a combined fee. It’s important to check your score approximately six months before a major purchase in order to give you time to improve your score, if necessary.

Improving Your Credit Score
There are several things you can do to improve your credit score, both in the short term and over time.

• Pay your bills on time.
• Pay down your debt.
• Check your credit report and correct any inaccurate items.
• Limit how frequently you apply for new credit and how much you charge on existing credit.
• Don't close old accounts – this can shorten the length of your reported credit history.

Understanding your credit score can help you make smart credit decisions and improve your overall financial situation.