One of the biggest questions people have about credit is “What Makes Up My Credit Score?”
How your credit score is calculated isn’t as mysterious as it seems. Your score is calculated by a mathematical formula based on the information in your credit report. Your FICO score is a number between 300- 850, with most people having scores between 600 and 800. However, it may seem complicated, because each of the three major credit bureaus, Experian, Equifax, and TransUnion, composes their own FICO score. Although each of these scores may be different, all of these scores are developed using the same mathematical model. Furthermore, FICO scores are dynamic and continually fluctuate as the information on your credit report changes. So, don’t be confused by these different numbers. Know what goes into determining your score and you can work to improve it.
There are many different factors that FICO uses to make up your score. Some factors are weighted more heavily than others, but they are all taken into account when calculating your FICO score. By understanding the different parts of your score, you can better understand how to improve it. Here are the five major categories that make up your credit score:
Payment History (35%)
Your payment history, the largest factor of your credit score, accounts for 35%. Payment history includes how you’ve paid your bills in the past, placing the most emphasis on your recent activity. This part has all of your account information, including any delinquencies and public records. So, if you have late or missed payments, accounts sent to collections, or declared bankruptcies, this will be factored into your score. However, the most recent activity will weigh a lot more than activities in the past.
Amounts Owed (30%)
The second most important factor is the amount that you owe on your accounts. This is any outstanding debt you have, whether it be money you owe on credit cards, car loans, mortgages, home equity lines, etc… In addition, this part includes your credit utilization ratio. This is the amount of credit you use compared to how much credit available to you. Experts advise that the lower utilization rate, the better. So, if you have a $5000 limit but you consistently spend $4000, you may seem like a bigger risk and your score will be a little lower.
Length of Credit History (15%)
This is how long ago you opened your accounts and the time since you’ve used these accounts. In general, the longer you have used credit, the better your score will be. It is important to keep your old accounts open, even if you don’t use them often, to lengthen your credit history.
New Credit (10%)
This factor is your pursuit of new credit. This includes the number of recently opened accounts and the number of recent credit inquiries. For those with payment problems from the past, re-establishing positive payment history is also taken into account.
Types of Credit Used (10%)
Last, FICO looks to see if you have a mixture of different credit accounts. The best credit scores have a mix of both revolving credit, including credit cards, and installment credit, like mortgages and car loans. A healthy mix of credit shows that you are able to use many different types of credit responsibly.
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