A Question that is Often Asked by Consumers
A question we hear a lot is, how are credit scores calculated? Well the answer is easy but still somewhat subjective depending on your credit profile. Let’s see if we can shed some light on, how are credit scores calculated.
FICO Uses several different factors to calculate your credit score. There are 5 different categories that are used to calculate your score. Here is a list of those 5 categories and the percentage or weight given to each:
- Payment History 35%
- Amount Owed 30%
- Length of Credit History 15%
- New Credit 10%
- Types of Credit Used 10%
This are the 5 basic categories that in some cases will determine your credit score. The reason we say some cases is because depending on your unique situation some may carry more weight than others. For example what if you are just starting out and don’t have a long credit history? What if you don’t have a lot of accounts because you’re trying to minimize your debt? What if you haven’t applied for new credit in a while?
Well that’s where it can get a little tricky. If that’s your situation then how are credit scores calculated? Well again let’s take the scenario where you are just starting out and you don’t have a lengthy credit history. In that situation some of the other 5 categories may play a bigger role in calculating your score.
Another thing to consider is that your credit score is constantly changing some factors may play a bigger part depending on your behavior. You see that’s where it can get difficult for a consumer to understand how their credit score is calculated. Here is an example, if you go out and purchase a new car you have now changed the amount owed as well as added new credit and the type of credit used. This new activity most likely will impact your score for up to 90 days.
The impact to your score will most likely be a lower score but as long as you make good on your new obligation your score should go back up and may even increase over time, depending on your overall debt load or how much you owe and again if you make your payments on time.
So in the case where you just made a new purchase using your credit you may want to hold off on financing the next item until your score recovers, such as a new home purchase. Now you see how this can be a bit confusing and obviously knowing how your score is calculated can be a benefit when trying to maintain and improve your credit score as well take advantage of the best interest rates.
In any case the 5 categories although not set in stone as far as impact on your score can be a good guild-line for improving or maintaining your credit score over time. If you want to learn more about credit and how it works, click below to get a copy of the FREE Credit E-Book and apply the steps suggested to maximize your score.