How Your Credit Score is Calculated

As numbers go, your credit score is really important. It’s a grade for how you’ve managed your money and it tells lenders and businesses if you’re a financial risk.

Your score often determines what you can buy and how much you’ll pay for it. A person with a good credit score may get a decent car for $300 a month, but someone with a bad score may not get a car or may get a less reliable one for a much higher payment.

The score “commonly used by lenders,” according to creditkarma.com, was developed by a data analysis company called Fair Isaac Corporation in 1989 and is called the FICO® score. Lenders also get information on your credit history from one or more of three credit bureaus: Experian, Equifax, and TransUnion. Each bureau has its own method for determining your credit score. Although methods differ, most companies use similar information to calculate your score.

Here’s what the FICO® score is based on, according to FICO’s website, myfico.com:

-35% - Your Payment History – whether you’ve paid your debts on time

-30% - How Much Money You Owe – compared to how much you can borrow. “Most creditors want to see you using 20% of the credit you have available,” says Meri Jones, Branch Manager with Town and Country Bank in Jacksonville. “If your credit limit on a card is $1,000 and every month your balance is $800, that’s hurting you. If you’re going to charge, pay it off every month or at least get the balance back to around $200, which is 20% of the available credit on that card.”

-15% - The Length of Your Credit History – “The longer your credit accounts have been open and in good standing, the better,” Jones explains.

-10% - New Credit – “If you’re applying for credit a lot, it probably indicates financial pressures, so each time you apply for credit, your scores gets dinged a little,” Jones says.

-10% - The Type of Credit You’ve Used – “Do you have experience with both revolving credit and installment type accounts or has your credit experience been limited to only one type?” explains myfico.com.

While your FICO® score is based on information in your credit report, lenders may consider other factors as well, including your length of employment and salary, according to myfico.com.

How to improve your score:

• Pay your bills on time
• Pay off debt
• Keep your balances on credit cards and other revolving credit low or pay them off monthly
• Apply for and open new credit accounts only as needed
• Don’t close unused credit cards – if you have a zero balance on one but have a $1,000 credit limit on it, that will show you’re not relying on all the credit you have access to
• If you’ve made late payments, try to get them removed
• Pay your collection accounts off and try to get them removed from your history. Normally, you can’t, “but sometimes if it was an error or a medical collection, they will remove those,” Jones says.
• Ask creditors to raise your credit limit and don’t use it. If you have a $1,000 balance on a card and they raise your limit to $2,000, that improves your credit utilization percentage.
• If you have any past due accounts, pay them
• Check your credit reports with the three credit bureaus each year and correct any errors. Federal law requires each agency to give you a free report once a year, according to forbes.com. To get yours, go to AnnualCreditReport.com.

“There is no quick way to fix a credit score,” according to myfico.com. “It takes patience and discipline.”

But it’s worth it.

“Everything and anything you want to buy requires having credit these days,” says Jones, who’s worked for a finance company and helped people improve their credit scores. “Getting a good, reliable vehicle, a cell phone, home insurance, and even cable TV is affected by your credit score. A good credit score will save you a lot of money in the long run.”