How Is My Credit Score Calculated?

The FICO scoring model looks at more than 20 factors in 5 categories.

1. How are your bills paid? 35 percent

What is most important is your past history of paying your bills. Do you pay on time?  Do you pay late?  Do you pay them late consistently?  The biggest emphasis is on the recent history so 10 late payments 6 yrs ago will not have the impact that 1 late payment in the past year will have. Accounts that have been sent to collection is worse than late payments and declaring bankruptcy is the ultimate negative on your report/score.

2. The amount of credit you have vrs the amount charged. 30%

A whopping 30% of your score is determined by this which is good and bad.  Good because it is something you can work at the make an immediate increase in your score.  Bad because many people can’t just pay down their debt at will so they can’t do anything to improve their score on this front.

What they do is look at the available credit you have and then how much you have charged.  So if you have $20,000 and have $15,000 charged to those accounts, you’re using 75% of your available credit.  This is not good.  They want to see it under 30% to give you the best boost in your credit score.

They do look at other factors such as car loans, mortgages etc as well but it is the credit card ratio that can really kill your score.

People who are always near the max of their cards limits are perceived as a much higher credit risk. 

3. Age of credit history 15%

Unfortunately, there is nothing you can do to change this or alter this.  The age of your credit is what it is.  The older your accounts are, the better.  Keep this in mind before you close an old card that you don’t use.  It is better to keep it open and use it yearly and pay it right off to keep it active.
The third factor is the length of your credit history. The longer you’ve had credit — particularly if

4. Types of credit 10%

What they want to see her is both revolving credit and installment credit. Revolving credit is credit cards while installment is a set amount that you pay down and when paid down, the loan is closed-like a car loan or mortgage.

5. Applying for credit 10%

Every time you apply for credit, you will see an inquiry on your report. Generally, each inquiry will lower your score slightly. But more than that, if a potential creditor sees you have recently requested credit from several other places, they are much less likely to approve you.  The FICO model does allow for you to do some comparison shopping for something like a car.  If you go to several dealerships to see who can give you the best rate, as long as they are within a short amount of time (a few days), they will only ding your score for one inquiry. The final category is your interest in new credit — how many credit applications you’re filling out. The model compensates for people who are rate shopping for the best mortgage or car loan rates. The only time shopping really hurts your score, Watts says, is when you have previous recent credit stumbles, such as late payments or bills sent to collections.

Now it is important to understand that credit reports are not perfect.  They do contain errors and it is up to you to check your credit report and check carefully for any errors.

If you believe you may be in the market for a new car or mortgage, you should check your report a few months before so you can fix any errors you may find.  There is nothing worse than finding what you want and then have your credit bite you.

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