How is your Credit Score calculated?
What’s in my FICO Scores
FICO® Scores are calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Scores are calculated.
How a FICO Score breaks down:
These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.
Payment history – Credit payment history determines 35% of my FICO Score
The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.
A few late payments are not an automatic “score-killer.” An overall good credit picture can outweigh one or two instances of late credit card payments.
However, having no late payments in your credit report doesn’t mean you’ll get a “perfect score.” Your payment history is just one piece of information used in calculating your FICO Score.
Credit payment history on many types of accounts
Account types considered for payment history include:
- Credit cards (Visa, MasterCard, American Express, Discover, etc.)
- Retail accounts (credit from stores where you shop, like department store credit cards)
- Installment loans (loans where you make regular payments, like car loans)
- Finance company accounts
- Mortgage loans
Public record and collection items
These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.
Negative factors include:
- Bankruptcies – will stay on your credit report for 7-10 years, depending on the type
- Wage attachments
Details on late or missed payments (“delinquencies”) and public record and collection items
The FICO® Score considers:
- How late they were
- How much was owed
- How recently they occurred
- How many there are
How many accounts show no late payment
A good track record on most of your credit accounts will increase your FICO® Score.
Amounts owed – Amount owed on accounts determines 30% of my FICO Score
Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low FICO® Score. However, when a high percentage of a person’s available credit is been used, this can indicate that a person is overextended, and is more likely to make late or missed payments.
Part of the science of scoring is determining how much is too much for a given credit profile. Your FICO Score takes into account several factors.
The amount owed on all accounts
Note that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.
The amount owed on different types of accounts
In addition to the overall amount you owe, your FICO® Score considers the amount you own on specific types of accounts, such as credit cards and installment loans.
Whether you’re showing an amount owed on certain types of accounts
In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. Having a low credit utilization ratio can be better than having a high one, or none at all. For example, closing unused credit accounts that have zero balances and are in good standing will not raise your FICO® Score.
How many accounts have balances
A larger number of accounts with amounts owed can indicate higher risk of over-extension.
How much of the total credit line is being used and other “revolving” credit accounts
Someone who is close to “maxing out” several credit cards has a high credit utilization ratio and may have trouble making payments in the future.
How much of the installment loan amounts is still owed, compared with the original loan amount
For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you’re able and willing to manage and repay debt.
Length of credit history (15%)
In general, a longer credit history will increase your FICO® Scores. However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks.
Your FICO Scores take into account:
- how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
- how long specific credit accounts have been established
- how long it has been since you used certain accounts
Types of credit in use – Credit mix determines 10% of my FICO Score
The FICO® Score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.
The credit mix usually won’t be a key factor in determining your FICO Score—but it will be more important if your credit report does not have a lot of other information on which to base a score.
Have credit cards – but manage them responsibly
Having credit cards and installment loans with a good payment history will raise your FICO Score. People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.
What types of credit accounts you have
Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?
How many types of credit accounts
Your FICO® Score also looks at the total number of accounts you have. How many is too many will vary depending on your overall credit picture.
Closing an account doesn’t make it go away
A closed account will still show up on your credit report, and its history will be considered by your FICO Score.
New credit – New credit determines 10% of my FICO Score
People tend to have more credit today and shop for new credit more frequently than ever. FICO® Score reflects this reality. However, research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history. Your FICO Score takes into account several factors, including how you shop for credit.
Its OK to request and check your own credit report
Checking your credit report won’t affect your FICO Score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers, such as myFICO.
How many new accounts you have
Your FICO® Score looks at how many new accounts you have by type of account. It also may look at how many of your accounts are new accounts.
Don’t open new accounts too rapidly
If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your FICO® Score if you don’t have a lot of other credit information. Even if you have used credit for a long time, opening a new account can still lower your FICO Score.
How many recent inquiries you have
An inquiry is when a lender makes a request for your credit report or score. Inquiries remain on your credit report for two years, although the FICO® Score only consider inquiries from the last 12 months. The FICO Score has been carefully designed to count only those inquiries that truly impact credit risk, as not all inquiries are related to credit risk.
There are 3 important facts about inquiries to note:
- Inquiries usually have a small impact
- Many types of inquiries are ignored completely
- The score allows for “rate shopping”
MYTH: My FICO Score will drop if I apply for new credit
TRUTH: If it does, it probably won’t drop much. If you apply for several new credit cards within a short period of time, multiple requests for your credit report information (inquiries) will appear on your report. Shopping for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.
Length of time since credit report inquiries were made
When you shop for credit, inquiries remain on your credit report for two years, although FICO® Scores only consider inquiries from the last 12 months.
How long it’s been since you opened a new account
Your FICO® Score may consider the time that has passed since you opened a new credit account, for specific types of accounts.
Whether you have a recent good credit history, having bounced back from past payment problems
Late payment behavior in the past can be overcome; re-establishing credit and making payments on time will raise a FICO® Score over time.
Re-Posted: Rebecca Schaafsma, Debt Relief Canada