Your credit score is one of the most important numbers in your daily life. Credit scores are used for loan approvals, determining interest and insurance rates, when screening for employment and rental applications, and even determining eligibility for cell phone contracts. But not everyone knows how credit scores are determined – and this is important to know.
One place to get this answer is to the myFICO website, which is a division of Fair Isaac, the company that created the FICO credit score. The FICO credit score is considered the benchmark credit score, as over 90% of banks use FICO credit scores when pulling a customer’s credit score. You can get a copy Free FICO Credit Score from each of the credit bureaus.
How your credit score is calculated
This chart breaks down the components of your FICO score.
Payment History – 35%
Your payment history is the largest component of your credit score. Lenders want to know your past performance for paying off your loans. Lenders are interested in the type of loan you had, such as a credit card, mortgage, installment loan (a loan with a fixed number of payments, like a car payment), consumer finance account (generally considered a lower tier type of loan made by companies who generally lend to higher risk individuals), etc. Lenders are particularly interested in these other factors as well:
- Number of accounts fully paid per agreement with the lenders.
- Bankruptcies, judgments, lawsuits, liens, wage garnishments, delinquencies, bills that have gone into collection, or other negative signs that you may be a credit risk.
- How long overdue you were on your payments.
- How much you were past due on your bills or collections.
- How recent these delinquencies or negative marks occurred.
- Number of past due items on file.
Amounts Owed – 30%
In addition to the types of loans and your payment history, lenders are concerned with how much money you owe. Even if you have a perfect credit record, there is a limit at which lenders will probably not lend you any more money – simply because your debt to income ratio doesn’t support lending any more money to you. These factors are considered for your FICO score:
- Amount owed on all accounts
- Amount owed on specific types of accounts (secured vs. unsecured, etc.)
- Number of accounts with balances
- Proportion of credit lines used (proportion of balances to total credit limits)
- Proportion of installment loan amounts still owed (remaining balance vs. original loan amount)
- Lack of a specific type of balance, in some cases
Length of Credit History – 15%
Lenders prefer lending to people who have consistently shown they can handle credit in the past. Chances are they will be able to handle making payments in the future. Some of the factors that make up your FICO score are:
- Time since all accounts opened
- Time since account opened, by specific type of account
- Time since account activity
New Credit – 10%
New credit refers to how much credit you have taken out recently. Lenders may become concerned if you have recently applied for thousands of dollars in loans and continue to request more lines of credit.
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
- Number of recent credit inquiries
- Time since recent account opening(s), by type of account
- Time since credit inquiry(s)
- Re-establishment of positive credit history following past payment problems
Types of Credit Used – 10%
Types of credit include credit cards, retail credit accounts, mortgages, installment loans, and consumer finance accounts.
In addition to the types of credit, your FICO score will also encompass the number of each type of credit, how often they are used, and any recent information for them.
Additional factors affecting your credit scores:
It is important to remember your FICO score takes all of these factors into account, not just some of them. Your credit score will take into account both the positive and the negative information from your credit report. However, it is possible to raise your FICO credit score over time by establishing a good track record.
Note: If you have only recently established credit, your weighting may be slightly different because you have no established credit history.
Lenders look at more than just your FICO score. Your FICO score is only comprised from information found within your credit report. Lenders, however, look at many factors when making a lending decision, including income, current employment situation, type of credit being applied for, and more.
Keep your credit score high. Your credit score can have a big effect on your life. Having a good credit score is important.
Free credit score. follow these directions to get a free copy of your credit score.