How Your Credit Score is Calculated

When you have conversations about credit scores, whether it is when you are applying for a loan for credit card, typically you are referring to as FICO score. Fair Isaac Company i.e. FICO score is often used to determine if you credit score is adequate to qualify for a loan etc.

The FICO score ranges from 300 to 850 and a mixture of credit history information is used to calculate your score. Some parts of your credit history receive more weight than others.

Payment History

• 35% weight
• Always paid bills on time - positive
• Any late payments, collections, bankruptcy - negative
• More recent issues i.e. late payments etc. hurt your score more than those you might had years ago

Level of Debt

• 30% weight
• the higher amount of debt you have the lower you score points on this section
• the ratio is the amount of debt to the available credit e.g. total available credit to you $50,000 - your debt level $48,000, vs. total available credit $50,000 - your debt level $5,000, the latter giving you a better credit score.
• balance of 40% or less would be ideal

Length of Credit History 15%

• The longer you have had credit the better your score
• ability to see how you have managed your credit for longer periods of time
• if you have a credit card you have had for years, it's good to keep it active, rather than canceling it as it shows longevity

Credit Report Inquiries 10%

• Any time somebody inquires about your credit there will be a notation on your credit report
• Too many inquiries could mean financial difficulties and may affect your credit score
• Recent inquiries, within the last year are tallied up when calculating your credit score

Mix of Credit 10%

• Mix of credit means balancing and managing different types of debt: home loan, car loan, credit cards, credit line etc.