How Your Credit Score is Calculated

Your credit score is an indicator to lenders of how likely you are to keep up with payments on your credit card or repay a loan. A high credit score is desirable for many reasons.  Lenders determine your eligibility for certain types of credit cards by credit score; the better your score, the more likely you are to get offered cards with generous rewards or lower interest rates. If you’re applying for a mortgage, you’re likely to get a better interest rate with a good credit score than you would if you have only a fair credit rating; that can save you thousands of dollars over the course of the loan.  A good credit score may also improve your chance of getting a job, since many employers now check your credit report to see if you are financially responsible.

So how do you get assigned a credit score anyway? And what can you do to improve that score?

Your score is based upon a mathematical formula used by a credit bureau or a lender.  The three major credit bureaus—Equifax, Experian and TransUnion—calculate your credit score using a formula developed by FICO (the Fair Isaac Corporation).   FICO scores range from 300 to 850; the higher your score, the better.

The FICO score is based on information in your credit record. The information is weighted in this way:

• 35 percent of your credit score is based on your payment history
• 30 percent on how much you owe
• 15 percent on the length of your credit history
• 10 percent on how much new credit you’ve applied for
• 10 percent on the types of credit used (credit cards, loans, store cards, etc.)

Information that FICO doesn’t include in figuring your credit score includes:

• Your race, color, religion, national origin, sex and marital status
• Your age
• Your salary, occupation, title, employer, date employed or employment history
• Where you live
• Any interest rate being charged on a particular credit card or account
• Any child support or family obligations or rental agreements
• Certain types of requests for your credit report (from potential employers, companies that want to offer you promotional credit card deals or your own request to look at your credit report)
• Whether or not you’ve used any kind of credit counseling

Since each of the major credit bureaus uses the same FICO scoring system, you might think that your credit score from each would be the same. But that’s not the case. Each credit bureau calculates your score based on the data that they have in your credit record, and that information can vary from bureau to bureau. For example, a lender that reports a loan payoff or a late payment to Equifax might not report that same information to TransUnion or to Experian.  If all three credit bureaus have similar information on you, however, your credit score from each should be pretty close as well.

Keep in mind, however, that other lenders, such as banks or credit card companies, may use a different method for calculating your credit score—either a different FICO scoring system, or a system other than FICO. They may, for example, take your income into account when determining your creditworthiness.

You can improve your credit score by:

• Making sure that you pay your credit card, loan and mortgage bills on time
• Get caught up on any late payments
• Keep your debt to income ratio (the amount you must pay in credit card, mortgage and loan payments each month  compared to your grossly month income) below 35 percent
• Don’t apply for credit that you don’t need; inquiries on your credit record from lenders can lower your score.