How Your Credit Score is Really Calculated

You probably know that you have a credit score; for better or worse. But how is someone’s credit score really tabulated? The FICO score is the gold standard of credit scores, and there are some very specific criteria that are used to calculate your FICO credit score.

According to the people at FICO, the average U.S. credit score is 692. To put that average score in the proper context, a rock bottom score is just 300 while a perfect FICO credit score is 850. With all of that information in mind, the average consumer has a credit rating that is on par with a C+ grade, and that’s not good.

Here’s a quick breakdown of all the components involved in calculating a FICO credit score:

Payment History is 35 percent of your Credit Score

It comes as no surprise that payment history is the most important component of your credit rating. Whether or not you repay your debts on time is very important to lenders who may or may not approve your loan application. FICO allows lenders to know whether or not someone is a risk to lend to by making payment history the most heavily weighted metric of your overall credit score. FICO uses mortgages, credit cards, student loans and auto loans when they put this information together to calculate your score.

Credit Utilization is 30 percent of your Credit Score

Another important component of your credit score is figured on how you make use of the credit that you have. FICO looks at your spending history, and includes important aspects, like whether your cards are maxed out and how much of your total available credit you are currently using. Consumers who keep high balances on their cards are often viewed as being higher risk than those who keep balances low.

Credit History Length is 15 percent of your Credit Score

Coming in next in the FICO credit score equation is the length of time that you’ve had your accounts open. FICO looks at the length of time accounts have been open along with the most recent activity on your accounts. To make a long story short, the accounts you’ve had open for the longest amount of time are important, but an account is useless to your score if you haven’t used it in years.

New Credit Card Accounts are 10 percent of your Credit Score

People have to build their credit scores by acquiring new cards and taking out new loans. FICO takes a look at how many hard credit inquiries (applications for new loans/lines of credit) you have had in the past. Hard inquiries can cause your score to take a hit, so avoid applying for new accounts when possible.
Credit Mix is 10 percent of your Credit Score

The last piece of the puzzle is the different types of accounts you have in your credit portfolio. As to what makes for a good mix, that is a little difficult to determine, as FICO has not been open about how this credit score component is determined. Suffice it to say that it is good to have a home loan, at least one credit card and possibly an auto loan on record to have a credit mix that will ultimately benefit your credit rating.

Now that you know all about the different components that FICO uses to calculate your credit score, you have the knowledge you need to walk the line and take the action necessary to get your credit score to a better place.

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