Have you ever asked yourself “how is my credit score calculated?” Do you even know what a credit score is?
Most people are probably familiar with the concept of a credit score and the importance of having a good one. But the method of determining one’s credit score is more of a mystery.
There are multiple companies that provide credit scores, but they each look at your financial history to determine your dependability.
If you’ve wondered how a credit score is calculated, you’re smart to do so! Knowing what goes into a credit score can help you make sure you score is the best it can be.
So if the question “how is a credit score calculated?” has been on your mind, keep reading, because we’re about to tell you.
What is a Credit Score?
For those readers who don’t know, here’s a quick run-down on what a credit score actually is:
A credit score is essentially a summary of your credit history and past dealings with lenders. It’s an at-a-glance indicator of how well you’ve handled your money.
You want the highest credit score possible. A higher number means your credit is better, and vice versa.
A credit score allows lenders to assess how must risk would be involved if they agreed to loan you money. In other words, it tells lenders how likely you are to uphold your end of the bargain and pay them back properly.
What About FICO Scores?
You may have heard of a FICO score and wondered what it was. Is it the same as a credit score?
Yes, and no.
FICO is a company: Fair Isaac Corporation. And your FICO score is just one of several credit scoring models.
Your score may not be the same when looked at across the different models, because they use different, though similar factors when determining your score.
For example, you’ll see a crossover between what VantageScore, another popular credit scoring model, and FICO look at when they create their scores. But they won’t be exactly the same.
You may hear “FICO score” and “credit score” used interchangeably because FICO is the most commonly used credit scoring company.
How is My Score Calculated?
Since FICO is the most commonly used company, we’ll look at the way they calculate a credit score. FICO has not revealed their exact method of calculation, however.
Even though we don’t have the whole story, we have the important parts, though. Here are the main elements that go into your credit score.
Your payment history accounts for 35% of your overall credit score. In other words, it’s really important.
Have you paid your bills on time? Have you ever declared bankruptcy or been sent to collections?
If you’ve had problems, how big were they and how quickly were they resolved? How long has it been since the problem happened?
All of these things are considered when FICO looks at your payment history.
The next largest part of your score is determined by the amount that you owe. This information accounts for 30% of your overall score.
FICO looks at how you’re currently using the credit you have available. In other words, how much debt you are in. They also look at the number of accounts you hold and why type of accounts they are.
Length of History
While this isn’t as big of a piece of your score, it’s still important and provides lenders with important information.
How old are your accounts? How long has it been since they were used?
If you have a long history of good credit, you’re in for lower interest rates. If your good credit has a shorter history, it won’t pack the same punch.
This is one reason why it’s important to try to always maintain a good credit score. The longer history of good credit you have, the better off you’ll be.
New credit is another element that FICO looks at when calculating your score. This refers to how often you open new accounts.
If someone keeps opening new lines of credit, that’s an indicator that payments may not be made. Each time you open a new account your score will take a hit.
Never open multiple new accounts at once. Doing so is detrimental to your credit score.
Types of Credit Used
The last thing taken into consideration is the type of credit you’ve used. Lenders like to see that you can handle different types of loans.
Do you have a mortgage and a car loan? Great.
Other types of loans, such as student loans, are great for variety as well.
Managing a variety of types of loans well sends a message that you’re probably going to be a safe and dependable borrower.
How is a Credit Score Calculated: A Summary
As you can see, a credit score isn’t calculated from a single event or loan. Your entire borrowing history, as well as the type of borrowing you’ve done, is taken into consideration.
How is a credit score calculated? By gathering all the information about the loans you currently have and have had in the past and seeing how you’ve handled them.
This information gives lenders an idea of how much they can trust you with their money. The better score you have, the more likely you are to get a loan and a better interest rate.
Though we all want a good credit score, having a bad one isn’t the end of the world. Head to our site to learn about loans for bad credit.