How is Your Credit Score Calculated?

Ever wonder how your credit is scored?  To those of us who don’t actually do the figuring, it seems like a deep dark secret…how do they arrive at those numbers?

While each of the three major companies that report credit scores has their own method, there are some factors that each one takes into consideration when they calculate your credit score, and you can use these same factors to estimate your own credit score.

For example, if you have never had a credit card, car loan, student loan, or any type of bill in your name, your credit score can actually be zero, meaning that you have no credit history.  At some point, each of us started at zero, and there are even those among us who have been debt free for enough years that their credit score has actually returned to zero, or no credit.

Unfortunately, if you have no credit, it can be just as hard to get a loan as it would be if you have bad credit, so it’s a good idea to build your credit slowly, beginning at an early age, and even though you may not actually need credit in later years, continue to maintain good credit standing by using credit cards responsibly.

And now, for the rest of us, here’s an approximation of credit scoring methods:

  • 35% of Credit Score:  Credit history
  • 30% of Credit Score:  Current amounts owed to creditors
  • 15% of Credit Score:  Length of credit history
  • 10% of Credit Score:  Open accounts and applied for accounts
  • 10% of Credit Score:  Other factors

Your credit history, which makes up 35% of your credit score, is defined as the bills that you have or have had in the past, and whether or not those bills have been paid. If you’ve always paid your bills on time, every time, and have never defaulted on a car loan, been evicted from a home, or paid your credit cards late, then your credit history should be okay.  However, if you do have a record of slow payment, repossessions, or bankruptcy, expect it to affect your credit for seven to ten years.

Your current debt load, which makes up 30% of your credit score, is defined as how many loans you have, how many credit cards you have (and the amount that you owe on each card), whether or not you pay your bills on time, and whether or not you are carrying too much debt.  Hint: Pay off and/or pay down the balances on your loans, credit cards, etc., to see a higher credit score in this area.

The length of your credit history, which makes up 15% of your credit score, is defined as how long you’ve had a credit history, how long you’ve lived at your current address (including length at previous addresses), and even how long you’ve been employed at your current and previous positions. Hint: The more stable your lifestyle, the better your score will be in this area.

Open accounts and applied for accounts, which make up another 10% of your credit score, are defined as how many open accounts you currently have (even if the balance on the account is $0.00), and how many new accounts you have either applied for or opened recently.  Hint: Opening too many new credit card accounts can damage your credit score.

And, finally, the other factors (10%) that will be taken into consideration include things like joint ownership of accounts, other information that has been collected with regard to your financial history, and the individual practices of each credit reporting company.