Have you ever wondered how your credit score is calculated? While it is unknown how FICO comes to your exact FICO score number they do disclose the major categories they consider and how much each categorgy is weighted. Your credit score consists of five major components that are relatively easy to understand. If you can master these five categories your credit score should help you to receive the best interest rates on any debts you apply for.
If you want to follow along all of these factors can be found on your own credit report. I’ve already written a step by step guide on how to get your free annual credit report that you are entitled to.
Payment History – 35%
Your payment history is the largest category that helps determine your FICO credit score. If you’ve never had any late payments you should received all of the points for this category. If you’ve had a payment that is more than 30 days late you’ve lost some points here. The longer you’ve been delinquent the lower your score goes. The more missed payments you have to worse your score gets. They also take into account how much the delinquent amount is.
To me it makes a lot of sense to have you payment history as the largest portion of your credit score. If you’ve made one late payment chances are you’re likely to make another. While it is possible that it could have just been a slip up and you forgot about a bill I’d be willing to be the majority of the late payments are due to financial struggles or constant carelessness. Having your paycheck run out before the end of the month is not a good position to be in and your credit score will reflect any struggles you’ve had in this area if it results in late payments.
Amounts Owed – 30%
The amount of money you owe is the next biggest factor that will determine your credit score. If you already owe a ton of money it is considered riskier to loan you additional funds because you’ll have yet another bill to keep up with!
Another factor in this category, in addition to the nominal amount of money you owe, is your credit utilization ratio. This is calculated by taking your outstanding balance on your debts and dividing it by the maximum credit limit you have on your debts. If you have five credit cards that each have a $10,000 credit limit (total of $50,000 in available credit) and you owe $10,000 in total on those credit cards your credit utilization ratio would be 20%.
Try to keep this ratio low in order to get the most points possible.
Length of Credit History – 15%
This is one of the easiest categories to understand! The longer you’ve had credit the more points you will get in this area. Another factor is the average age of all of your credit accounts. If you’ve recently opened up a lot of new accounts your average age will get much younger and probably knock a few points off your score.
Credit Mix – 10%
This 10% chunk of your credit score represents the diversity of the types of accounts on your credit report. Types of accounts include revolving credit (credit cards), installment loans (think car loan), mortgages and student loans. This is only 10% of your score though so I wouldn’t take out a student loan if you don’t need one!
Inquiries – 10%
This is the last 10% of your score. Inquiries are also called hard pulls and are normally from applying for new credit. The more inquiries you have in the last 12 months the lower your score will be. One tip for this section is if you’re going to be shopping around for a loan do it in a short time period (2 weeks max) so that all of the inquiries only count as one against your score.
Do these categories make sense to you? What’re your thoughts on how FICO credit scores are calculated? If you’re interested in seeing an approximation of your credit score (called the Experian National Equivalency Score) check out my review of Credit Sesame and sign up to see your score free!