How Your Credit Gets a Score
Most of us understand that our credit rating is the single biggest factor determining how easily we can borrow money. Our credit rating also shapes the interest rates that we must pay for that convenience. A seemingly minor difference of a percentage point or two can amount to a lot of money over time, especially on mortgage interest. Likewise, the amount of money we pay to credit card companies, if we carry a balance from month to month, depends largely on what credit bureaus have to say about our credit ratings. When a lender talks about your credit score, he or she is typically talking about the Fair Isaac Corporation, or FICO® credit score rating. Lenders order your credit rating from the three national credit bureaus: TransUnion, Experian, and Equifax.
Whether they choose to look at your Experian credit rating or the FICO® score rating from the other two credit bureaus, lenders use your credit rating to determine your financial health and how responsibly you've used credit to conduct your affairs. But how do they arrive at a number? What formula is used to calculate your credit score? Here's a breakdown of the elements that go into determining your credit rating:
- Your payment history (35%). A solid record of making on-time payments to creditors improves your credit rating and accounts for about 35% of your overall score. A bankruptcy or late payments of any kind can increase your risk level in the eyes of lenders and will lower your Experian credit rating or FICO® score.
- Your debts (30%). This portion of your credit rating is determined by how much money you owe; the number of accounts in your name that have balances, and the amount of available credit you're currently using. The closer you are to the maximum limit of your available credit, the lower this portion of your credit score will be.
- The length of your credit history (15%). This portion of your FICO® score is a bit subjective. Generally, a longer credit history results in a higher score. But you can also achieve a higher score with a short credit history if your credit report shows that you've managed your credit responsibly.
- New sources of credit (10%). If you've applied for and received new lines of credit from several different sources, credit bureaus take a look at this and weigh it against your credit history. As your amount of available credit rises, this can be a positive factor in your credit rating. But if you quickly run up debts on these new sources, that's viewed negatively by the credit bureaus because it suggests an increased risk of default.
- Miscellaneous factors (10%). This portion of your credit rating is determined by the different types of credit you carry, including credit cards, car loans, home loans, and other sources of credit. Generally, this category has a positive effect on your FICO® score or Experian credit rating if you've managed your credit responsibly.
Hopefully, this article has removed some of the mystery from the process that credit bureaus use to determine your credit rating. Please bear in mind that it's always a good idea to monitor your credit rating so that you can correct any errors. You're entitled by law to one free credit report each year from each of the three major credit bureaus. A modest investment of time to track your credit reports could save you a lot of money in the long run.
Read More About Credit Scores
- Your Credit Score: How Your Credit Cards Influence It
- The Relationship between Credit Scores and Age
- Credit Scores vs. FICO VantageScores
- Why Each Credit Bureau Has Its Own Credit Score
- Medical Bills Don't Have to Ruin a Credit Score
- Chapter 7 or 13 Bankruptcy Can Affect Credit Scores
- A Credit Score Estimator Can Be a Valuable Financial Tool
- Ordering Your Credit Score From a Credit Bureau
- What is a Bad Credit Score?
- Factors That Damage Your Credit Score
- Who Has the Right to Check My Credit Score?
- What Is a Good Credit Score?
- Credit Score Myths
- How Credit Scores Are Calculated
- Why You Need to Know All Three Credit Scores
- Store Credit Card Application Could Damage Your Credit Score
- What Are the Three Credit Bureaus?
- How Credit Scores Affect Insurance Premiums
- Student Habits That Kill Your Credit Score
- International Credit Score
- What A Credit Card Balance Does to Credit Scores
- How a HELOC Affects Your Credit Score
- Medical Credit Score
- Your Credit Score May Be Worse Than You Think
- FICO - What is Coming in 2009
- Credit Score Ranges
- Five Parts to Your FICO Credit Score
- How Corporate Cards Affect Your Personal Credit Score
- Who Wants to Know Your Credit Score
- Credit Rating - How Your Credit Gets A Score
- Credit Line and Your Credit Score