How Is Your Credit Score Calculated?
Money Girl explains what factors actually affect your credit score the most.
Laura Adams, MBA
Q: “How can I know my credit score and whether it’s calculated correctly?”
A: There’s no such thing as one credit score. Creditors use many different credit scoring models to evaluate a potential customer’s creditworthiness.
Each credit scoring model calculates a different score because they crunch data in your credit reports differently and evaluate it according to varying scales.
We generally don’t know the exact calculation of a given credit scoring model. However, one of the most well-known and popular models, the FICO (Fair Isaac Corporation) score, publishes the variables it uses to create scores on a scale from 300 to 850. The higher the number, the better your score.
Here are 5 factors used by FICO to calculate your credit score:
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Payment history (35%) – such as late payments, accounts in collections, and bankruptcies affects your score the most. Making payments on time is a critical factor for maintaining good credit.
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Credit utilization (30%) – is the amount of debt you have compared to your available credit. Using a smaller percentage of your available credit boosts your score.
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Account history (15%) – is how long you’ve had credit account open. Having older accounts improves your score.
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Credit inquiries (10%) – are applications for new credit accounts, which can lower your score.
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Credit type (10%) – is the variety of credit accounts in your name, such as credit cards, auto loans, and mortgages. Having a mix of credit types helps improve your score.
Notice that your payment history and credit utilization influence a FICO score the most. For instance, you’ll get the biggest boost to your credit by paying bills on time and keeping low balances on credit cards.
Since data in your credit reports is used to calculate credit scores (no matter the credit scoring model), make sure it’s correct. Review your report from each of the 3 nationwide credit agencies every 12 months for free at annualcreditreport.com.
For more information about how to check your credit reports and get your credit scores for free, download the free Credit Score Survival Kit. It includes a video tutorial that allows you to look over my shoulder as I check my own credit reports. The kit also includes a free ebook and audiobook with 3 legitimate strategies to build your credit fast!
Check Mark on Excellent Credit image from Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.