How Is Credit Score Determined

credit score

Your credit score can make or break you: It can determine whether you’re approved for a loan, can rent an apartment, even whether you’ll be hired for a job. Despite the impact your credit score has, it’s rare to find someone who understands the factors that go into calculating the number, or how to go about raising it.

Three credit bureaus — Equifax, Experian, and TransUnion — all vary slightly when it comes to how they calculate your score, but the basic breakdown remains the same. Most credit checks involve a combined score from all three bureaus.

According to FICO, here are some of the basic categories that affect a person’s score, with approximate weight assigned to each:

  • Payment history: 35 percent of your credit score
    If you make late payments on bills like your mortgage, credit card, or car loan, your credit score is likely to drop. Conversely, paying regularly and on time will improve your score.
  • Amounts owed: 30 percent of your credit score
    This figure depends on the amount of debt you owe versus your available credit. Ideally, you shouldn’t charge more than 35 percent of your available credit on a credit card.
  • Length of credit history: 15 percent of your credit score
    Lenders want to see a lengthy history of responsible credit use, so it’s not a good idea to close the credit card accounts you’ve had the longest, even if you no longer use them.
  • Types of credit used: 10 percent of your credit score
    Your score will be higher if you have a history of handling different types of credit, including installment, revolving, consumer finance, and mortgage loans.
  • New credit: 10 percent of your credit score
    This part of your score is based on how many new credit accounts you opened in a short period of time. Hard credit inquiries, which happen when you apply for a credit card or loan, can hurt your score, especially if several occur within a short time frame. Therefore, it’s not a good idea to open new credit accounts within six months before you applying for a mortgage or other loan.

How to Improve Your Score
If your credit score is not what you’d like it to be, you can change it over time:

  • If you have delinquencies on your credit report, start with those and work to pay off any outstanding balances.
  • Start paying all bills on time. If you can’t, call your creditors and work out a payment arrangement.
  • If you see an error on your report, call the consumer credit bureau that provided the report and state your case. Credit bureaus are required to correct errors within 30 days or suppress the line of credit until the error is fixed.
  • You can often improve your score by opening an additional credit card, if you’re diligent about limiting your use. A smart idea is to put one recurring expense — like a cell phone bill — on your new card, and setting up an automatic payment each month.

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