How Is My Credit Score Calculated?

How your credit score is calculated is like the secret formula for Coca-Cola — nobody really knows.

However, FICO, a leading software for calculating a person’s credit score, released five categories on what’s most important when figuring that magic number, including a percentage for each category’s effect on your score. Here’s how FICO breaks it down:

1. Payment History: 35%
2. Length of Credit History: 15%
3. Amount Owed: 30%
4. Types of Credit: 10%
5. New Credit: 10%

Here’s a short synopsis of each category and what it means to you.

Payment History – Notice that this category holds the most weight. It looks at late payments. Thirty days late is not as significant as 60 to 90 days late. It also looks at the last time the payment was late—the more time that passes, the better. They also consider how many times a payment has been late. Let’s say you’ve made 56 payments on time, with only one of them being late — that has less impact than if you’ve made 56 payments and 12 of them were late.

Length of Credit History – While the percentage is on the lower end of the scale, it still matters. They are looking to see when you first started using credit, the number of accounts and how long you’ve had them. If you’ve just started using credit, it’s possible to still get a good credit score, but typically everything else has to be positive.

Amount Owed – More accurately, this should read, “revolving debt,” which is something that you can borrow over and over again like a credit card. This really does not apply to installment loans such as a mortgage or student loan, which have final payments. On “revolving” accounts, if there are high balances, or if credit cards have been maxed out, then the credit-scoring formula figures that it is a greater risk, causing the credit score to be lower. One side note here: Closing a credit card account that currently has an outstanding balance can actually HURT your credit score.

Types of Credit – This is one of the areas of confusion because the scoring models do not reveal what “mix” of credit helps or hurts your credit score. What I do know is that they are looking for auto loans, the number of mortgages, installment loans and credit card accounts, and whether those are “balanced” versus having five car loans and no credit cards.

New Credit – Having credit inquiries on a credit report is not a bad thing, but they may hurt your credit score if you apply for a lot of credit in a short period of time. The credit bureaus look at how many credit inquiries you have, how many new accounts were opened and over what time period the new accounts were opened.

If you have any questions about this or how they affect someone getting a mortgage, call my team at (813) 707-6200 or fill out the short form below. You’ll be happy you did when you see how it can affect your mortgage payment.