How a FICO Credit Score is Calculated

Ever wondered how it is that a credit lender can decide in under 30 seconds whether or not to extend you credit?  They can do so based on a little number that is connected to your identity- and I'm not talking about your social security number!  I'm talking about your credit score.  This score is a number that predicts how likely you are to repay your bills.

Not only are credit scores used for deciding approval or not, but they are how lenders determine what interest rate to give you when you finance a purchase or borrow money.  The higher your credit score, the higher the potential for an individual to repay their bills, so people with high credit scores end up getting the lowest interest rates.  It's something like a reward system!

Calculating Scores

How exactly does your credit score get calculated?  It's actually a combination of all the information found in your credit report, with each item having different weights.  The FICO score (one of the most popular credit scoring models) looks at twenty pieces of information in five different categories.

35 Percent of Your Score: How Bills are Paid

If you are typically a person who pays his or her bills on time, you'll have a higher score in this category and it's wieghted 35% of your total credit score.  The score depends more on the most recent bill paying activity than on your old history.  Having late payments consistently is going to hurt your score, and of course- having accounts that have been sent to collections will really hurt your score!   This category of your credit score is most affected when people declare bankruptcy.

30 Percent of Your Score: How Much Money is Available

Next to how you pay your bills in terms of importance is the amount of money you currently owe.  The balance of your credit ards, mortgages, automobile loans, home equity loans, college loans, personal loans and any other types of financing is all taken into consideration, as is the amount you have still available to spend on each of your revolving accounts.  For example, if you have four credit cards with $10,000 credit limits, you have $40,000 of credit available to you (even if you don't carry a balance on any of the cards)

Your credit score is adversely effected when you have several accounts that are all very near the maximum amount you have available to you- even if you always make your payments on time. 

15 Percent of Your Score:  Credit History Length

You get more "points" for having a longer history of credit, since creditors have more of an oppotunity to view how you tend to make your payments.

10 Percent of Your Score:  Type of Credit

Higher scores are the result of individuals who have a good mix of the different types of credit.  Lenders believe that individuals with a variety of credit types have stronger statistics for knowing how to handle money properly.  So, you'll have a higher score if your credit includes a mix of revolving credit (credit cards) and installment loans, like automobile loans and mortgages.  You would have a lower score if all you had on your report were credit cards.

10 Percent of Your Score:  Applying for New Credit

If you have a few (or more than a few!) late payments in your credit history, it will hurt your score if you apply for new credit frequently.  This is seen as a person having problems financially- and lenders think you're looking for money to bail you out.  Statistically, this tactic for handling finances typically leads to trouble and bankruptcy.

There are other factors that lenders may take into consideration when determining whether or not to extend you credit, but those listed above are the factors that result in your FICO credit score.  Other items of interest to lenders may be your age, how long you've been employed at your job, the amount of income you have, if you've been turned down for credit by other lenders and whether you own or rent your home.