How Is Your Credit Score Calculated?
Money Girl explains what factors actually affect your credit score the most.
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:
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.
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.
Account history (15%) - is how long you've had credit account open. Having older accounts improves your score.
Credit inquiries (10%) - are applications for new credit accounts, which can lower 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!