How your credit score is calculated

A credit score is a number assigned to a person which indicates their ability to repay a loan. You probably know that your credit score can affect your ability to borrow money, but it also can impact other aspects of your life. A low credit score can make it harder to rent an apartment, get a cell phone or even land a job.

FICO: most common

The FICO score is the most common credit score in the United States, but there are different versions of the FICO score, each using a slightly different algorithm that produces a slightly different score. In addition, there are industry-specific scoring models. For instance, your auto lender might pull a score that places more emphasis on your previous auto loans, while your mortgage lender might pull a different score. If you are tracking your credit score, you may also notice slight variations between the three credit reporting agencies: Transunion, Experian and Equifax.

Most consumers will see only slight variations in these scores. It’s more important to understand what goes into calculating your FICO score, and which aspects of your credit history affect your score, either positively or negatively. Once you understand that, you can draft a plan to improve your personal score.

How do you repay your debt?

Do you pay your bills on time, or do you tend to be late with payments? Have you missed payments in the past? It matters. Your payment history comprises 35 percent of your FICO score making it the most important factor in calculating credit scores. One of the best ways to improve your credit score is to make payments on time, every time.

How much do you currently owe?

When you take out a credit card, you are given a credit limit  – a maximum amount that you can charge on that card. If you borrow up to the limit on your credit cards, you are doing damage to your FICO score. Some 30 percent of your score is based on your credit utilization – the percentage of your available credit that has been borrowed. FICO says borrowers with the best scores tend to average around 7 percent credit utilization, but 10 to 30 percent usage is OK.

Credit utilization and payment history combined make up nearly two-thirds of your score. So in addition to making on-time payments, take care not to max out your credit cards if you’re trying to improve your credit score.

How old is your debt?

When calculating your score, FICO considers how long each of your accounts has been open and how long it’s been since you last used the account. This makes up 15 percent of your total score.

Before you apply for new credit, be aware that 10 percent of your score is how much credit you’ve applied for lately. FICO says opening a lot of new lines of credit suggests you may be in financial trouble and need access to lots of credit. Avoid opening too many lines of credit at the same time to avoid damage to your credit score.

What’s in your credit mix?

What kind of debt you have makes up the final 10 percent of your credit score. FICO says borrowers whose history shows a mix of revolving credit and installment loans represent less risk to lenders.

See other debt consolidation steps

  1. Understand your debt
  2. Make a debt reduction plan
  3. Create a spending budget, stick to it
  4. Find ways to cut costs
  5. Learn 5 ways your credit score can affect your life

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