How Credit Scores Are Calculated

 The details surrounding how credit scores are calculated are still largely a mystery, as each agency’s algorithm is proprietary information. However, we know the FICO model is based on these five main credit score factors:

  • Payment history (35 percent): Paying your bills on time is not only important if you want to avoid late fees, it’s also the No. 1 factor in your FICO score. Indeed, payment history accounts for more than a third of that number. Even one or two missed payments can seriously impact your score.
  • Amounts owed (30 percent): The total amount of debt you owe in comparison to your total available credit is another important factor, accounting for a third of your FICO score. This is often referred to as your credit utilization ratio; experts recommend keeping it below 30 percent.
  • Length of credit history (15 percent): Lenders want to know you’ve been in the credit game for a while. The longer your credit history is, the better.
  • Credit mix (10 percent): The diversity of your accounts also helps boost your credit score. This shows that you can handle a variety of debts, such as credit cards, student loans or a mortgage. Of course, your accounts need to be in good standing or else they’ll negatively impact your FICO score.
  • New credit (10 percent): Too many hard inquiries and new accounts within a short period of time will throw up a red flag that you might be struggling to keep up with your bills. So if you’re rejected for a credit card, don’t try your luck elsewhere; wait several months and improve your credit first. And if you’re rate shopping for a home, auto or student loan, do so within about 45 days so that all the inquiries are treated as one. Fortunately, this factor only makes up 10 percent of your FICO score, so opening a new account every now and then will have a negligible impact.

Credit Score Ranges

When it comes to what constitutes good or bad credit, each creditor has its own definition. However, these ranges are considered standard, according to FICO:

  • Exceptional: 800 and above
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 579 and lower

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