Credit Score Calculation

Learn what factors are included in your credit score calculation and what things you should and should NOT do to improve your credit score. For instance, did you know that closing all of your $0 balance credit cards could actually damage your credit score instead of improve it?

What Is A FICO Score or a Credit Score?

Your credit score, also known as your FICO* score  represents your current financial position.  The higher the score the less the risk you are to a creditor and the more likely you are to receive credit with very favorable terms, such as a low interest or no interest.  (*Fair Isaac COrporation formulated the calculation to determine your 3-digit credit score).

Your credit score can also determine how much of a down payment you will have to pay for a new house, as well as whether or not you can purchase a vehicle, or possibly even get a job--some employers will look at your credit report.

How Does Your Credit Score Work?

Your credit score is a combination of factors which include your payment history, the outstanding balances of your accounts, the length of your credit history, the types of credit used, and new credit. The value of each is approximates the following %'s:

35% - Your Payment History
30% - Amounts Outstanding (Amounts Due)
15% - Length of Your Credit History
10% - Types of Credit Used
10% - New Credit

Your Payment History

Your payment history factors in how many accounts you paid on time, how many were delinquent (including the length of the delinquency as well as the time since your last delinquent payment) and any negative public records or collections you've had.

Your Outstanding Balances

Your outstanding balances are reviewed to try to determine a couple of things, such as the types of debt you have (credit cards versus a mortgage loan or vehicle loan), how much credit is available on your revolving accounts, the status of your installment loans (to determine if you're making consistent payments), and the number of open zero balance accounts you have. 

Length of Your Credit History

Basically, the longer you've had (good) credit, the better.  This demonstrates a pattern of how you treat your creditors, which is assumed to continue in the future.  It includes the length of time since accounts were opened as well as the time passed since the last activity.

Types of Credit Use

You want to have a mixture of account types versus several credit card (revolving type) accounts. Total number of accounts and types of accounts (installment, revolving, mortgage, etc.).

Your New Credit

Your new credit section takes the following things into account: Number of accounts you've recently opened and the proportion of new accounts to total accounts, the number of recent credit inquiries, the time that's has passed since recent inquiries or newly opened accounts, if you're credit has improved after having some credit problems. 

Basically, this is just a check to make sure you aren't running around town opening up credit cards.

What's a Good Credit Score?

Credit scores (usually) range from 340 to 820. The higher your score, the less risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline. Here is a scale

Excellent:	750+
Very Good:	720 - 749
Average:	660 - 719
Fair:	620 - 659
Poor:	less than 620

What Are Some Ways To Improve Your Credit Score?

Armed with information about what goes into the calculation of your credit score, you can develop your own plan for improving your score. Here are some suggested ways of improving your score:

1. Pay your bills on time. 2. Don't open a lot of new accounts over a short time period, especially if you have a short credit history. 3. Shop for credit over a short period of time. 4.  Don't give your social security number out for a credit check until you've chosen a lender (too many inquiries in a 2-year period can adversely affect your credit) 5. Open a few new credit accounts, use them responsibly, and pay them off on time. 6. Don't close $0 balance accounts (it can affect your utilization ratio--total debt to total credit --and decrease your score).  7. Keep your balances low (less than 25% of the total in relation to your available credit. 8. Pay off high interest credit card debt as quickly as you can. 9. Avoid having any bills "charged-off".

Mortgage lenders look at more than one score...

Lenders typically look at other factors that aren't included in the report, such as income, employment history, and the type of credit you are seeking.  When applying for a mortgage, your lender will most likely pull credit reports and scores from all three major credit reporting agencies: Transunion, Equifax, and Experian. They'll probably use the middle score to work your loan application. To be sure, ask your lender to explain which credit scores will be used and how they affect your loan application.

Conclusion:

If your credit score is 720+, then I would suggest that you keep doing what you're doing (hopefully, that includes checking your credit report frequently).  If not, then try not to get discouraged, as you're not alone.  The good news is you can improve your credit score.  It's just going to take a little more time than it did to damage it.  You should see a difference within 12 months. 

If you've reviewed your free credit report, then you may have already discovered that your credit score was not listed.  If you would like to find out what your credit score is right now, click the link at the top of this page.  It's quick and painless.  Your lenders shouldn't be the only ones who know how you rate.       

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