The Mystery Behind Your Credit Score Calculation

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Your credit cards affect your credit score, but so do your student loans, car loans, and mortgage.

If you’ve come this far, you probably realize how important it is to have a good credit score. A bad credit score can prevent you from borrowing loans you may need to purchase a home or vehicle, cause you to have high interest rates, or even keep you from getting a job or an apartment.

Most lenders or companies that inquire about credit scores use the FICO score. But what goes into it? You may not realize everything that does or how each factor is weighed. If you don’t know, how are you supposed to better your score?

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The FICO Score

The Fair Isaac Corporation (FICO) created software to calculate an objective score based on a person’s credit history. The three major credit bureaus (Experian, Trans Union, and Equifax) that use this software to determine your credit score based on data from lenders and creditors. Credit scores are used in over 90% of lending decisions in the United States.

What Is Your Credit Score Based On?

Payment history (35% of your score): This is the largest factor considered. This category looks at how well you have paid on time in the past, which lenders see as an indication of how well you will pay in the future. If you want to improve your score, the best thing to do is pay on time from here on out.

How much you owe (30%): FICO doesn’t look at just how much you owe in general, though. Rather, your score depends on your ratio of available credit to how much of it you are using. You should shoot to keep your use under 25% of your limit. For loans, it is better to pay them off rather than move them around, i.e., borrow another loan to pay off the first one.

The length of your credit history (15%): The longer your credit history, the better off you are in this category. It takes into account how long your accounts have been established, the average age of all of your accounts, and how long it’s been since you used certain accounts. If you are new to borrowing, try not to apply for too many types of credit at once.

The types of credit you use (10%): Your score considers the mix of credit accounts that you have (e.g., student loans, car loans, mortgage, credit cards). A good mix is usually a good thing—but remember that when you close an account, it will likely still affect your credit score for years to come. Closing it won’t make it go away.

The amount of new credit you have (10%): Opening new credit on its own doesn’t affect your score significantly, but you should be aware that opening multiple lines of credit in a short period of time will, as well as making you look like a risky borrower.

What Isn’t Factored In

Though a lender may request some of the items below in a credit application, none of them will be used to determine your credit score:

  • Race, color, religion, national origin, gender, age, and marital status
  • Salary, occupation, title, employer, employment dates, or employment history
  • Receipt of public assistance
  • Info not found in your credit report
  • Whether you are participating in credit counseling or not

As of this fall, FICO will also no longer factor in debts with collection agencies that have been paid off or settled.

Next Steps

Now that you know what goes into your credit score, you should go to this site to request a credit report—you can do this once from each of the three major credit bureaus every 12 months for free.

If your score isn’t as high as you would like (generally 650 and above is considered “good”), take a look at what is included in your credit report. Once you have this information, you can start trying to boost that score in the right direction now that you know how it was calculated in the first place.

Do you have questions about your credit score? Ask them in the comments.

(Photo: Republica)

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