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How are Credit Scores Calculated?

 Your payment history, credit utilization ratio, length of credit history and types of credit used are all ingredients into your credit score. 


The actual FICO formulas used to create your credit scores are technically a secret owned by Fair Issac Corp.  The formulas have been reverse engineered so that you can get a very good estimate of what your score will be.  Several companies use the Vantage 3.0 scoring model which will give you a good idea what your FICO score.


Payment History – 35% As you might expect, the repayment of past debt is a major factor in the calculation of credit scores. ...


Amounts Owed – 30%.  This is how much is owed vs how much you have available.  For instance if you have two credit cards with a total balance owed of $5,000 and a total credit available of $9,000 you would be using 56% of your available credit.


Length of Credit History – 15% Your average age of the credit sources.  If you have two cards and one you have had for 5 years and one for only 1 year your length of credit history would be 3 years.  This measure becomes much more important when you have minimal credit history.


Credit Mix – 10% Do you only have one credit card or do you have a car loan and a home mortgage also.  


New Credit – 10%  How many times you have approved a hard credit check in the last two years. 


Another description of How Credit Scores are Calculated

In the United States, there are three major credit reporting agencies (CRAs) - Equifax, Experian, and TransUnion - that collect and maintain information on your credit history. Each CRA uses a slightly different method to calculate your credit score, but they all consider similar factors, including:

  • Payment history: This accounts for a large portion of your credit score and reflects whether you have made your payments on time. Late or missed payments can have a negative impact on your credit score.

  • Credit utilization: This refers to the amount of credit you are using compared to the amount of credit available to you. Using a high percentage of your available credit can be a sign of financial strain and may hurt your credit score.

  • Credit history length: A longer credit history can be a positive factor in your credit score, as it shows that you have a track record of managing credit responsibly.

  • Credit mix: Having a diverse mix of credit accounts, such as a mortgage, a car loan, and a credit card, can be positive for your credit score.

  • New credit: Opening several new credit accounts in a short period of time can be a red flag to lenders and may lower your credit score.

The exact formula used to calculate your credit score is a closely guarded secret, as it is the intellectual property of the credit scoring company. However, it is generally accepted that the above factors are the most important in determining your credit score.

A Quick Tip to increase your Credit Score Quickly

When I was in a retail business I often charged many thousands of dollars on my credit card to get the points and then I would pay it off at the end of the month. My Credit report would show that I owed a lot of money on my cards even though I paid them off every month. So when I was preparing to apply for a loan or credit card I would pay my credit cards before the statement printed. This jumped my credit score by several points. One time it jumped my score by over seventy points. If you are preparing for a home loan or major loan pay your credit cards before the statement prints.

What Factors can be used to figure your credit score? Age? Race? Sex? Income?

Age. Race. Sex and income are not used to figure your credit score. Your Social Security number and your credit history are the only factors used to calculate your credit score. However if you are applying for a loan your statements on your loan application will also be used. Your annual income will always be asked when you are applying for a loan or credit card.

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