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How Is Your Credit Score Calculated?

Are you thinking about buying a house but don't know what affects your credit score? Your credit score is one of the most important measures of creditworthiness. Your FICO Score is a three-digit number, usually ranging between 300 and 850, and is based on metrics developed by Fair Isaac Corporation. By understanding what impacts your credit score, you can take steps to improve it.

 

Your FICO scores are unique and are calculated based on these five categories:

1. Payment History

2. Amounts Owed

3. Length of Credit History

4. New Credit

5. Credit Mix

 

Okay, but what does that mean? Let’s break down each of these categories.

 

Payment History – 35%


Your payment history accounts for 35% of your score – how you’ve repaid your credit in the past. This shows whether you make payments on time, how often you miss payments, how late the payments were (how many days past due), how much was owed, and how recently and how often you missed a payment. Payments that are made over 30 days late will typically be reported by your lender and will lower your credit scores. The higher your number of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your credit score. Your credit history will also detail how many of your credit accounts have been delinquent in relation to all of your accounts on file. This category will consider all of this information, which is why this section has the bigger impact on determining credit scores.

 

Key takeaway: when a lender or creditor looks at your credit report, a question they are trying to answer is, “If I extend this person's credit, will they pay it back on time?”

 

Amounts Owed – 30%

 

How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the amount of money owed compared to how much credit you have available. This is applied to all of your credit accounts, as well as each account individually. High balances and maxed-out credit cards will lower your credit score, but smaller balances may raise it (on-time payments, of course!). A general rule of thumb around credit utilization is to keep your amounts owed under 30% for a good credit score, but try to keep your credit usage as low as possible if you can.

 

Length of Credit History – 15%

 

The length of your credit history accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be. If you’re young and/or just starting your credit journey, don’t fret; we all have to start somewhere! This category looks at how long specific accounts have been open, how long since you last used your accounts, the age of your oldest account, and the age of your newest account. You may think, “Well, I don’t use this credit card anymore; I should just close it,” but this can actually hurt your score. Credit scoring models usually look at the average age of your credit when factoring in history. This is why you might consider keeping accounts open and active. Try rotating your credit cards to use accounts that you may haven’t used in a while to keep them active.

 

New Credit – 10%

 

New credit makes up 10% of your score. If you have opened many accounts recently or applied for new credit, it may suggest potential financial trouble and may lower your credit score. This does not mean you are necessarily risky; just be cautious of how many credit applications you are applying for in a short amount of time.

 

Credit Mix – 10%

 

The last credit factor is credit mix, which makes up 10% of your score. This data looks at the types of credit accounts you have. Having a mix of accounts, such as credit cards, mortgages, student loans, auto loans, and installment loans, may help improve your score. However, it is not necessary to apply for different accounts that you do not need.

 

The percentages in the chart below reflect how important each of the categories is in determining how your FICO Scores are calculated. The importance of these categories may vary from one person to another, depending on your personal situation. For example, scores for people who have not been using credit for a long period of time will be calculated differently than those with a longer history.

 

Have more questions? Contact us today!


How is your Credit Score calculated? What affects your credit score?

 

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