How Is Your Credit Score Calculated?
Published on 8/26/2021
The Credit Score Factors
Your credit score is based on the following five factors (with their weights).
Payment history (35%)
Amount owed (30%)
Length of credit history (15%)
Credit mix (10%)
New credit (10%)
The percentages above reflect how important each of the categories is in determining your score. All of these categories are used in your overall score.
Why Are Credit Scores Important?
Credit scores are especially important if you are considering applying for any type of loan. If you've received a loan, a credit card, or even auto insurance, the interest rate you paid was directly related to your credit score. The higher your score, the better you look to lenders to repay borrowed money. People with the highest credit scores get the lowest interest rates since they are considered more trustworthy to pay their debt back.
What Is the Difference: Credit Score and FICO Score?
These terms mean the same. FICO's Score (created by the company FICO, Fair Isaac Corporation) is one of the most common measurements most used by lenders to determine the risk involved in doing business with a borrower. Its score, a measure of consumer credit risk, has become a fixture of consumer lending in the United States. Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Scores but establishing or re-establishing a good track record of making payments on time will raise your credit score.
How Do Lenders Use Credit Scores?
Credit scores are used by lenders to determine the risk involved in doing business with a borrower. If you've been paying your bills on time for the past 10 years, you're likely a low-risk person to lend money to. If you've been consistently late on your credit card payments and your balance on the card is at the credit limit, you will have a lower score and are considered a higher risk.
Your FICO Score is calculated only from the data in your credit report. However, lenders may look at other things when making a credit decision, such as your income, your current job employment history, and the kind of credit you are requesting.
Your credit report and FICO Scores evolve frequently. Due to this, it's not possible to accurately measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Often, a negative item on a credit report can lead to a sudden decrease in your credit score.
What Can You Do To Improve Your Score?
Ultimately, the best way to help improve your credit score is to use loans and credit cards responsibly and make prompt payments. Improving a credit score usually takes time and patience. The more your credit history shows that you can responsibly handle credit, the more willing lenders will be to offer you credit at a competitive rate.