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How is Your Credit Score Calculated?

The exact formula for calculating your credit score is an industry secret.  I can see them now, sneaking around with their calculators, judging me.  We don’t know how they do it, but we do know what information on which a credit score is based, and how heavily each piece of information is weighed.

*(percentages are approximate)

1.  Payment History (35% of score)

What is your track record?  Have you paid your accounts on time in the past?  This is an important factor in your credit score.  Accounts considered include credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.  A few late payments won’t “kill your score.”  An overall good credit picture can outweigh a few instances.  However, having no late payments doesn’t guarantee a perfect score either.  Also considered are public record and collection items (bankruptcies, foreclosures, lawsuits, liens, and judgments).  These are pretty serious, but the older or lesser amounts count less than more recent and larger ones.

2.  Amounts Owed (30% of score)

Having credit accounts and owing money doesn’t necessarily make you a high-risk borrower with a low credit score.  But when a high percentage of your available credit has already been used, it can mean that you’re overextended and likely to miss payments.  If you are “maxing out” accounts or have  numerous accounts that have balances, then you may be seen as a high risk.

3.  Length of Credit History (15% of score)

In general, a longer credit history will increase your score.  Although, even people who haven’t been using credit very long can have a high score.  It depends on what the rest of your credit report says.  The age of your oldest account and your newest account are taken into consideration, as well as the average age of all your accounts.

4.  New Credit (10% of score)

Opening several credit accounts in a short period is a sign of greater risk – especially for those who don’t have an established credit history.  Multiple credit requests also represent greater risk.  However, the score can distinguish between a search for new credit accounts and rate shopping for something like a mortgage loan.  The score considers how many new accounts you have, and when you opened your last account.

5.  Types of Credit in Use (10% of score)

They’re looking for a “healthy mix” (whatever that is) of credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans.  You don’t need one of each, and you shouldn’t run out and open an account you don’t intend to use.  This isn’t a key factor, but it could be important if your report doesn’t have a lot of other information on which to base a score.  They’ll consider what different types of accounts you have, and how many of each.

For more information on credit scoring, visit: http://www.myfico.com/CreditEducation/

ABOUT AUTHOR / Andi

Andi is a Marketing Assistant at ACCC. He is passionate about supporting financial literacy efforts and helping to educate people on the Talking Cents blog!

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