How Is Your Credit Score Calculated?

A few decades ago, many people couldn’t make sense of how credit scoring worked. Eventually, more people started paying attention to these crucial numbers and how they’re calculated. Consumers understood that their credit scores could have a strong impact on their capability to qualify for financing and how much they’d have to shell out to borrow money. But yet, not everyone fully understands the factors that are taken into account in determining credit scores. Here’s a look at how credit scores are calculated.

The Components of Your Credit Score

By design, your credit score is a result of the information discovered on your credit report. If an item isn’t displayed on a credit report, it can have no impact on your score. For instance, your bank account balance isn’t shown on your credit report, nor is your net worth or income displayed. Therefore, these factors do not affect the scoring model while it’s calculating your credit score.

The following are the factors that play a role in determining the FICO score used by major credit reporting agencies:

Credit Mix – 10 percent

This deals with the types of accounts that are displayed on your credit reports, such as installment loans, retail accounts, credit cards, mortgage loans, and finance company accounts.

New Credit – 10 percent

This criterion is determined by the number of recent inquiries, i.e., credit checks that show up on your credit report. Your credit score may be affected by hard inquiries for up to 12 months.

Credit History length – 15 percent

The third most crucial parameter is the length of credit history, i.e., the age of your accounts. The older your account, the more points you may earn for your overall credit score.

Amounts Owed – 30 percent

You can maintain a better credit score with a low balance-to-limit, i.e., credit utilization ratio. Thus, it is ideal for you to pay down your credit card balances.

Payment History – 35 percent

Paying your bills on time won’t earn you a perfect FICO Score of 850, but it’s a great starting point.

For every category, the scoring model has questions regarding your credit report. These questions are called characteristics in the world of credit scoring. The variables are the answers to these questions, and the number of points you earn is determined by them. You receive your credit score once the scoring software sums up all of those points.