How Is My Credit Score Calculated?
How Your Credit Score is Calculated: The New Formula
You have seen all the commercial ads on television on the importance of knowing your credit score and staying on top of it. If you have rented an apartment, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there is a good chance your score was accessed.
But just how do the credit agencies calculate those scores that can make or break your ability to obtain credit? Your basic credit score is calculated with a software program created by Fair Isaac Corporation [www.fairisaac.com] and is called a FICO score. The three national credit bureaus use their own version of the FICO scoring method - Equifax has the BEACON score, Experian has the Experian/Fair Isaac Risk Model and TransUnion has the EMPIRICA score. The three versions can come up with varying scores because they use different mathematic formulas and may have different information.
While FICO will not disclose how they actually compute the credit score the FICO score itself is known to be calculated by using a combination of data that appears on your credit report.
* 35 percent - An individual's history of making credit payments on time
* 30 percent - The total debt to available credit ratio
* 15 percent - The length of time credit lines have been open
* 10 percent - The frequency with which someone applies for new credit
* 10 percent - Other factors such as the types of credit lines
Other factors used to formulate the final score are:
* Time at present job
* Time at present address
* Are you a homeowner?
* Number of recent inquiries
* Number of credit lines on your report
*Number of years you have had a credit in the credit bureau database
Recently FICO updated the way they analyze and score credit reports to better serve consumers and the credit industry. The redeveloped FICO 08 score offers more refined risk prediction compared with prior versions. As a result, the formula provides significantly improved risk evaluation across the entire population of consumers, more than twice the improvement offered by prior updates. The new formula improves the predictive power for credit shoppers and those with prior blemished credit histories, as well as adjustments to better address consumers who have limited credit experience.
Some consumers may see their credit scores go up slightly but most will remain unchanged. The new formula also provides greater flexibility regarding the negative effect of missed payments on a credit report. For borrowers who are in behind on an account, their scores may drop less if they have a number of other credit accounts in good standing.
