How Are Credit Scores Calculated?

How Are Credit Scores Calculated?

Credit scores are important in our lives. They can be the basis of whether you can get a new car, buy your own house or even borrow money when you have financial difficulties. You can easily get a free credit report for a quick credit score check. 

Contrary to popular belief, there is more than one credit score. The two major types of credit scores, the FICO score and Vantage Score, use different ways of calculating your credit score. However, the FICO score has been used by the industry since 1989 and is used by over 90 percent of the top lenders. 

FICO Score Credit Report

Lenders want to perform a credit check on your FICO score credit report to make sure that lending you money is not too risky. You can easily get a free credit score check to make sure that your credit score is high enough before you apply for a loan. 

Generally, your credit scores differ only a few points from each other. That means your Experian credit report is close to your FICO score credit report. If you want to increase any of your credit scores, you have to improve certain factors that can affect your credit score. 

Using the public FICO score credit report, the following are the most important factors that can affect your credit score. 

Payment History (35%)

Paying your bills on time will get you a higher credit score.

Any lender wants to know whether or not you are on time in paying your past debt. This is the single most important factor when it comes to your credit score. If you are paying your debts on time and do not have any history of missed payments, you almost certainly have a high credit score. 

On the other hand, if you have a lot of missed payments in your payment history, it might be a red flag for some of the lenders. It indicates that you cannot pay the loan you are applying for on time. Since it is weighted as 35 percent of your FICO score credit report, this is the most important factor you have to fix to make sure that you get a high credit score. 

Quick Tip:

Pay all your debts on time. Not only do you avoid charges, but you can also increase your credit score for a future loan you might apply for. 

Amounts Owed (30%)

A debt-to-income ratio below 43% is the ideal amount owed.

Lenders can look into your debt-to-income ratio, which can determine if you have enough money coming in to pay for your loans and mortgages. Ideally, the ratio should be kept at 43 percent and below for a good credit score. 

If you have more than 43 percent on your debt-to-income ratio, it simply means that you owe more money than you are earning, and therefore, may not be a good candidate for another loan. 

Quick Tip:

If your debt-to-income ratio is above 43 percent, focus on paying your loans first before taking out another loan. You might want to get refinancing loans from your creditors to make your loans more manageable for you. 

Length Of Credit History (15%)

Longer credit history can increase your credit score.

There are many factors included in the length of your credit history. Credit bureaus can check the age of your oldest credit account and your newest account, and also the average age of all of your accounts. The length of your credit history can impact your credit score.

Of course, if you have a bad payment history, the length of your credit history is not enough to make sure that you have a high credit score. 

Quick Tip:

Get a secured credit card first if you do not have a credit card yet. It is the fastest way of improving your credit score so you can apply for a much bigger loan later on. 

New Credit (10%)

Opening several credit accounts in a short amount of time lowers your credit score.

Even though you may have a good payment history, opening several new credit lines may mean that you are in a financial crisis and, therefore lowers your credit score. A lot of new credit can signal that you have not handled your finances before and this can affect your credit score. 

If you take out one loan at a time and make sure that you have a spotless payment history, you can get a higher credit score. 

Quick Tip:

Plan your loans ahead of time. Do not take out more loans even if you have a good debt-to-income ratio, as it can be bad for your credit score. Also, you have to make sure that you are only taking out loans that you actually need. 

Credit Mix (10%)

More types of credit accounts with available credit can get you a higher credit score.

If you have a lot of different kinds of loans, such as student loans, mortgage loans, credit cards and installment loans, and you are paying for all of them on time, it can increase your credit score. 

For a full credit score check, the number of accounts you owned and the total available credit you have is checked. This means that you know how to handle your finances well even if you have multiple accounts, and therefore, you are trustworthy for a new loan. 

On the other hand, if you have multiple accounts that are currently maxed out, then you may get a lower credit score. This shows that you cannot handle your accounts well and might not be the best candidate for a loan. 

Quick Tip:

Since it is just 10 percent of the weight, you do not have to force yourself to open credit lines to show that you are the right candidate for a loan. Instead, just take loans you genuinely need and focus on having a good payment history. 

Bottom Line

Since it is vague how each credit bureau calculates their score, it is not possible to compute your own credit score. Instead, you can get a free credit score from one of the credit bureaus such as Experian, Equifax, or TransUnion, to get your free credit report that can also contain card score. 

Getting a good credit score is truly helpful as you can get different kinds of loans when you need it. However, you have to make sure that you are doing the right things to avoid getting a low card score once you get your free credit check in any of the credit bureaus.

By Admin