How is My Credit Score Calculated?

Everybody wants to know what exactly contributes to your credit score. Simply put, your credit score is nothing but a number that helps lenders decide whether or not you are eligible for a credit or a loan. This score is generated by using a technique or formula that takes into account your entire credit report. Although there are many versions of this technique the most used technique is the one developed by the Fair Isaac Company and is better known among creditors and lenders as FICO score.

Your credit history is not just one single report, it is divided into many sections and sub-sections and the knowledge of some of these parts are of more importance to creditors and therefore have a greater weightage when calculating your score rating. The exact equation to calculate your score is known only to the Fair Isaac Company, but here you can get the basic information that is used in calculating the credit score.

  1. History of Payment-35%: For a lender whom who you have approached for a loan, your payment history gives valuable information about your payment of bills. Regular late payment of bills and debts and bankruptcy can affect your score and the more recent and often these occur, the worse your credit score is bound to be.
  2. Level of Debt-30%: Each credit or credit card will have a limit. Credit utilization is the debt you have when compared to your limit. If your credit utilization is very high, then it means that you are fast reaching your limit and this will lower your credit score. The best thing to do is to maintain your credit balance to about 30% of your limit.
  3.  Credit History Length-15%: If you have a credit history which dates back to a long time, it adds to your credit score as the creditors will be assured that you can pay your debts on time. Keeping your old accounts open is always the best thing to do.
  4. Inquiries-10%: An inquiry gets added to your report every time you apply for credit. Having many inquiries implies that you are in a habit of borrowing lot of credit. These inquiries are taken into account for only the first year.
  5. Credit Mix-10%: It is better to have different accounts as it proves to the creditors that you are good at managing money. This is an important factor only if you have a very recent credit history.