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Credit score formula - What you need to know

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By: anonymous
on 26th Feb,2014

So, you should try to have a clean credit record so that you have a good score.
Credit score formula - What you need to know

Do you know that whenever you apply for a loan, the creditors assess your creditworthiness through your credit score? If you have a good score, then you can take out a loan at your favorable terms and conditions. So, you should try to have a clean credit record so that you have a good score. Go through this article to know what a credit score is and what factors influence your credit score.

Credit score - What it means

A credit score is actually a 3-digit number that usually ranges in between 300 and 850. The higher your score, the better are your chances to take out a loan at favorable terms and conditions. Your credit score is calculated as per FICO (Fair Isaac Corporation) credit scoring model.

Credit score - Its components

Though the actual formula that FICO uses to calculate your score is secret, yet there are certain components on the basis of which your credit score is calculated. The components are discussed below:

  • The payment history - About 35% of your credit score is based on how you have made your debt/loan payments till date. It includes your credit card payments, mortgage payments, and other loan payments along with wage garnishments and/or lawsuits that have been taken against you. So, make your payments on time to have a good score.
  • Your outstanding balance - It gets about 30% weightage for your credit score calculation. If you have too many debts, then it is evident that you haven't been able to manage your credit accounts well. This usually happens when you take out too many loans that might lead to loan defaults.
  • The length of your credit history - How long you have been taking out loan or using credit is a major constituent of your credit score. So, even if you have been making your payments before the due date and you don't have too many loans outstanding, your credit score can be a bit low if you don't have a long credit history. About 15% of your score depends on this criterion.
  • New credit you have taken out - About 10% weightage is given to this factor when your credit score is calculated. If you open too many accounts recently, then it'll negatively affect your score. A number of hard inquiries in a specific time also affect your credit score negatively. So, do not apply for too many credit accounts in a short period of time.
  • Types of credit you use - This factor constitutes about 10% of your credit score calculation. It is dependent on the various types of loans you have. It is better for you if you have different types of credit accounts instead of only revolving credit accounts, that is, credit cards.

It is advisable that you check your credit reports at regular intervals and correct errors if any. If there's any negative item in your reports and they are correct entries, then try to add positive information in your reports. Also, check your credit score once a year so that you have a clear knowledge regarding your score and you can try to improve it, if required.

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