How are Credit Scores Calculated
Credit scores are calculated based on a variety of factors obtained from your credit report.
Credit scores are calculated using proprietary algorithms to assess information found in your credit file.
A credit score is a numerical representation of your credit profile. It makes it easier for lenders to systematically make loan decisions. Credit scores are a reflection of how you’ve handled credit in the past and are used to determine your potential credit relationship in the future.
Credit Scores Calculated Using
- Your bill-paying history
- The number of accounts you have and what kind
- How much of your available credit you are using
- How long you have had your accounts open
- Your recent credit activity
- Whether you have had a debt collection, foreclosure, or bankruptcy, and how old these are
By law, the calculation of your credit score cannot use or take into account factors such as race or color, religion, gender, national origin, or marital status.
Credit Score Ranges
The most commonly used credit score is known as FICO. The name comes from the Fair Isaac Corporation, which developed the scoring model. They are used to predict the likelihood that a person will pay his or her debts. The scores use only information from credit reports.
- FICO credit score range: 300 – 850
- VantageScore credit score range (version 4.0 or later): 300-850
Credit scores are calculated based on a variety of factors obtained from your credit report. FICO and VantageScore have shared the categories used to calculate scores such as payment history, amounts owed, length of credit history, new credit, and credit mix. However, we don’t know much else about the math behind the score.
FICO’s Credit Score Factors
The exact information used by credit scoring providers (such as FICO) to calculate your credit score is top secret but there is some publicly available information. For instance, FICO has shared that 5 factors make up your credit score:
- Payment History (35%) – the largest percentage because paying on time is important for lenders to know.
- Amounts Owed (30%) – also known as capacity. It’s based on the amount of outstanding credit you have against your available credit limits.
- Length of Credit History (15%) – how long you’ve had credit plays a role on your credit score. Longer credit histories are viewed positively. Adding new accounts can lower your overall credit history length.
- Types of Credit in Use (10%) – this is based on the mixture of credit such as credit cards, personal loans, mortgages, auto loans, etc. A good variety is generally accepted as strengthening credit scores.
- Account Inquiries (10%) – applying for credit impacts your credit score and having too many recent loan applications (or inquiries) can have a major negative impact. Apply for credit when absolutely necessary.
VantageScore Factors
VantageScore 4.0 calculates credit scores based on these factors:
- Payment history: 41%
- Age/mix of credit: 20%
- Utilization: 20%
- New Credit: 11%
- Balance: 6%
- Available credit: 2%
Keep in mind these are approximations and there’s a lot more that goes into calculating your score that isn’t shared publicly.
How to Check Your Credit Score?
The Federal Credit Reporting Act (FCRA), established a federal law that guaranteed access to your credit report, but not to credit scores. Even if you get your free credit report through AnnualCreditReport.com, you’ll have to pay to get your credit score.
Recently applied for a loan?
- Approved for a loan: Ask for your credit score from the lender.
- Denied a loan: You’ll receive an Adverse Action Letter from the credit bureau used which will include a credit score.
How to Get Free Credit Scores?
Credit Karma changed the game when they began offering consumers access to a free credit score. Now, many companies from banks to apps provide access to free scores.
- Call your bank or credit union if they offer free credit scores. You can also look at the app or online banking to see.
- Check your credit card provider and the app. Many offer credit scores.
- Download a free credit score app. Check the financial marketplace for your free credit scoring apps.
Many of these free credit score apps require your authorization to access your credit report. The request is a soft inquiry that does not impact your score. Additionally, many free credit score apps offer additional services such as credit report cards, credit monitoring and alerts, score simulators, tips to improve credit, and more.
Keep in mind the important thing to remember about your credit score is where you fall into the credit score range.
Why are Scores Different?
You may notice your credit scores are different even though it came from the same credit bureau. Credit scores differ due to a variety of factors including incorrect or missing information on your report and the different algorithms used to calculate credit risk.
