How are credit scores calculated?
The different credit bureaus look at your credit history and apply their own formula to determine what your credit score should be. This score, often called a FICO, is determined by five different factors. Each bureau weights things differently, so the FICO score is usually different with each bureau. The following points are typically used, though TransUnion claims to now provide a new 8 risk score to help lenders evaluate potential borrowers.
1. Payment History
The payment history for every credit account that has reported information about you over the past six years is used to assign a score for this area. It will add up to 35% of your total score.
Adverse information such as late payments or skipped payments will hurt your score. The more times you have been past due, the lower your score. If you have defaulted on any of your accounts and had them go to collections, your score will drop even lower. The more recent this information is, the more impact it has on your score.
2. Total Debt
The credit bureau also looks at your credit limits and how much you owe each creditor. This will equal 30% of your FICO score. It is generally recommended that your debt to credit limit ratio never rise above 33% for the best score in this category.
3. Length of Credit History
Even though the report doesn’t contain any information past six years, having credit that is older than six years helps your score. The longer you’ve kept a credit card with one institution, the more stable it makes you look. A long, stable credit history equals 15% of your FICO score.
4. Old to New Credit Ratio
Many new accounts can hurt your credit score. Even a lot of recent credit inquiries will hurt your points in this category. Fortunately, it only accounts for 10% of your score.
5. Mix of Credit
The types of debt you owe are also considered. The credit bureaus prefer to see a mixture of credit—some revolving debt, some fixed debt and a mortgage if possible in the mix. If you only have credit card debt, your score will be lower than if you have all three and have a good income to debt ratio. Fortunately, this also only accounts for 10% of your score.
Once your score in each category is calculated, a final number is determined. This becomes your credit score. The higher the number, the better.
Learn more about improving your credit score.
