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How Your Credit Score Is Calculated

Fair Isaac (the company that invented the FICO scoring system) does not give out the exact formula for computing your FICO credit score.  However, we do have something to work with—the factors that weigh on your credit and its exact percentages.  Your credit score is calculated using the following five factors.  They percentages is how heavily it weights on your credit score.

Payment History (35%)

Your payment history is the most important factor in your credit score; and rightfully so.  That is because your credit score essentially measure the likelihood that you will be late on a bill for at least 90 days.  Late payments on your credit report doesn’t really mean “late” though.  You would have to be late at least 30 days in order for it to appear on your credit report.  On your credit report, there is three late categories; 30 days, 60 days, and 90 days.  So the credit bureaus will not know until you are at least 30 days late on your payments.  The most recent the late payment, the more it affects your credit.

Debt-To-Credit Ratio (30%)

This is the second biggest factor of your credit report and accounts for 30% of your credit score.  This aspect measures how well you utilize your credit and what kind of spender you are.  Ideally, you want to be at 35% or under.  That means you should use 35% of your allowable credit or less.

Length of Credit History (15%)

The amount of time you’ve had credit is the third biggest factor in your credit score.  The longer the history, the more favorable your credit score will be, assuming all other variables hold.  That is why you should not, in general, cancel your older credit cards because it erases the credit history you’ve established with that card.

New Credit Acquisitions (10%)

A small amount of your credit score depends on hard inquiries.  That means every time you are looking for new credit, the lender will look at your credit report—that is a hard inquiry.  If you have a habit of applying for credit month after month, it will drag your credit down a bit.  If you want to apply for new credit (mortgages, auto loans, credit cards, etc), do it in batches.  All hard inquiries within a 30 day range will count as only one total inquiry on your credit report.  So if you apply for three credit cards and four mortgages within a month, it will only count as one hard inquiry.  Now don’t get a hard inquiry with a soft inquiry.  A soft inquiry is when you check your credit score/report using such services as Credit Karma, Equifax, Experian, etc.  A soft inquiry will not affect your credit report.

Types of Credit (10%)

A little bit of your credit score is dependent upon your types of credit also.  Lenders like to see varying types of credit on your report (mortgages, auto loan, credit cards, etc).  But this is the least important factor of all and you should not go out of your way to get new credit to improve your credit score.  A boost of a few points is really not worth the extra debt and collateral.

If you were to calculate your credit score in your head, you can get pretty close to your actual credit score using these percentages and guidelines.  For instance, if your credit score is currently 725 but you’ve just made a big purchase of $5,000 on one of your cards.  Your credit utilization is now, say, 65% instead of 35%, then within the next 30 days, you can estimate that your credit score will go down about 20-40 points when your credit card issuer reports the purchase to the credit bureaus.  If you have a 725 credit score but you were 30 days late on one of your payments, then you can estimate that your credit score dropped at least 50 points.  As a side note, late payments (30 days, 60 days, and 90 days) seem to affect higher credit scores more than lower credit scores.  So if you have a high credit score, your score will drop more by being late than if you had a bad score.

Having a good credit score is not rocket science.  We do not need to know the exact formula Fair Isaac uses to compute our credit score.  Bu you abide by the above guidelines, your credit score should be fine.  So as a recap, here is how you go about maintaining good credit:

  • Keep your balance on your cards low, ideally under 35% of your total credit limit.
  • Pay everything on time.
  • Don’t close old credit accounts as they provide you with credit history
  • Mix up your debt a little bit
  • Don’t shop around for credit too often


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