Your credit score is calculated based on information in your credit report, which is like a financial report card. It includes details about your borrowing history. By effectively managing the factors that influence your score, you can be better prepared to improve your creditworthiness and potentially secure better terms for future credit.

Let’s take a closer look at how credit scores are calculated, focusing on the factors that influence your score.

How Are Credit Scores Calculated?

The exact method can vary between different scoring models like FICO or VantageScore, but they all generally consider similar types of information from your credit report.

5 Key Factors Used in Calculating Credit Scores

Payment History (35% of FICO Score)

What It Includes: This factor considers your track record of making timely payments on all your debts, including credit cards, mortgages, car loans, and other forms of credit.

Why It’s Important: Payment history is the most heavily weighted factor because it provides a clear indication of how reliably you pay your debts. Late payments, bankruptcies, foreclosures, and other payment issues can significantly lower your score.

Credit Utilization (30% of FICO Score)

What It Includes: Credit utilization measures how much of your available credit you are currently using. It’s calculated by dividing your total current credit card balances by your total credit limits.

Why It’s Important: Utilization shows how reliant you are on credit. High utilization can be a sign that you’re overextended and may have difficulty managing your credit. Financial experts often recommend keeping your utilization below 30%.

Length of Credit History (15% of FICO Score)

What It Includes: This includes the age of your oldest credit account, the age of your newest credit account, and the average age of all your accounts.

Why It’s Important: A longer credit history provides more data for lenders to assess your creditworthiness. Generally, consumers with a longer credit history are seen as less risky than those with a shorter history.

Types of Credit in Use (10% of FICO Score)

What It Includes: This factor looks at the mix of credit accounts you have, such as credit cards, installment loans, retail accounts, mortgage loans, and finance company accounts.

Why It’s Important: A variety of credit types might indicate that you can handle different types of lending responsibilities. However, it’s not crucial to have one of each, and you shouldn’t open new accounts solely to increase your credit mix.

New Credit (10% of FICO Score)

What It Includes: This includes the number of new accounts you have opened, the number of recent inquiries into your credit report, and the time since your last account opening.

Why It’s Important: Opening many new credit accounts in a short period can suggest greater risk, especially for people who do not have a long credit history. Each time you apply for credit, a hard inquiry is made, which can lower your score slightly.

Additional Notes on Credit Score Calculation

  • Scoring Models Vary: Different credit scoring models may have different scales and weigh these factors slightly differently. For instance, VantageScore also considers these factors but might weigh them differently depending on the overall information in your credit report.
  • Frequent Updates: Your credit score can change as new data is reported to the credit bureaus. Most lenders report regular payments and changes in balances monthly.
  • Regional Differences: Credit scoring models may also be adjusted for different regional or lender-specific requirements.

Next, we cover why these scores are so crucial and how they significantly shape your personal financial landscape.

By Admin