How is my credit score calculated?

By Chad Langager AAA
A:

The credit score, commonly referred to as a FICO score, is a proprietary tool created by the Fair Isaac Corporation. This is not the only way to get a credit score, but the FICO score is the measure that is most commonly used by lenders to determine the risk involved in a particular loan.

Due to the proprietary nature of the FICO score, the Fair Isaac company does not reveal the exact formula it uses to compute this number. However, what is known is that the calculation is broken into five major categories with varying levels of importance. These categories, with weight in brackets, are payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%) and type of credit used (10%). All of these categories are taken into account in your overall score - no one area or incident determines your score.

The payment history category reviews how well you have met your prior obligations on various account types. It also looks for previous problems in your payment history such as bankruptcy, collections and delinquency. It takes into consideration the size of these problems, the time it took to resolve them, and how long it has been since the problems appeared. The more problems you have in your credit history, the weaker your credit score will be.

The next largest component is the amount that you currently owe to lenders. While this category focuses on your current amount of debt, it also looks at the number of different accounts and the specific types of accounts that you hold. This area is focused on your present financial situation, and a large amount of debt from many sources will have an adverse effect on your score.

The other categories (length of credit history, new credit and type of credit used) are fairly straightforward. The longer you have a good credit history, the better. Common sense dictates that someone who has never been late with payment over twenty years is a much safer bet than someone who has been on time for two. Also, people who apply for credit a lot probably already have financial pressures causing them to do so, so each time you apply for credit, your score gets dinged a little. And finally, a person with only one credit card is less risky than a person with 10, so the more types of credit accounts you have, the lower your score will be.

It is important to understand that your credit score only looks at the information contained on your credit report and does not reflect additional information that your lender may consider in its appraisal. For example, your credit report does not include such things as current income and length of employment. However, because your credit score is a key tool used by lending agencies, it is important that you maintain and improve it periodically.

For more information, read The Importance Of Your Credit Rating and Consumer Credit Report: What's On It.

RELATED FAQS

  1. What are the different types of cash advances?

    Find out the different types of cash advances along with their different features to determine which option, if any, is best ...
  2. Does a cash advance hurt my credit score?

    Find out if a cash advance will hurt your credit score and how your credit report and requests for new credit can be affected ...
  3. Is it better to get a balance transfer or a personal loan to pay off my credit card ...

    Find out what you should consider before deciding to pay off your credit card debt by taking out a personal loan or using ...
  4. What's the difference between a grace period and a moratorium period?

    Find out what grace periods and moratorium periods are, what you have to do to get them and how they can benefit your financial ...
RELATED TERMS
  1. Debt Snowball

    A method of debt repayment in which debtors pay off their smallest ...
  2. Credit Card Authorized User

    Definition of an authorized user of a credit card.
  3. EMV

    A standard relating to integrated circuit cards, point-of-sale ...
  4. Integrated Circuit Card

    A card that has an embedded circuit, such as a computer chip. ...
  5. Gray Charges

    Fees consumers pay via credit card or debit card for unwanted ...
  6. Credit Card Teaser Rate

    A lower-than-normal interest rate that a credit card company ...
Related Articles
  1. A new poll finds what financial tools Americans are most thankful for -- both sexes say the product they value most is the venerable savings accounts.
    Savings

    Giving Financial Thanks In Thanksgiving ...

  2. Handled correctly – and very carefully – a promotional credit card balance transfer offer can save you money. Here are some of the best deals around now.
    Credit & Loans

    Best Credit Cards For Making Balance ...

  3. Capital One's VentureOne® Rewards Credit Card offers travelers no annual fee and a menu of perks.
    Credit & Loans

    Review: The VentureOne® Rewards Credit ...

  4. The credit crunch and recession caused financial fear, so it's no great shock that our borrowing habits have changed from less than a decade ago.
    Credit & Loans

    How Our Borrowing Habits Have Changed ...

  5. Sometimes you can find a better deal than a cash advance – but some alternatives are even more pricey. Where to find the cheapest source of quick cash.
    Savings

    8 Quick-Cash Alternatives To Credit ...

Trading Center