How are Credit Scores Calculated?
Credit scores are calculated by combining five fairly major categories with different levels of significance to come up with a credit score. The FICO score, which is the most commonly used scoring system, was developed by the Fair Isaac Corporation. This is the most widely used system of coming up with a credit score that lenders use to evaluate the risk that would be involved when looking at approving a loan.
Although the exact calculation of getting this score is not revealed, it is a fact that there are five significant categories that are used to combine information to come up with a score. These five categories are ones payment history, the amount of current debt outstanding by individuals, the time and/or length of ones credit history, any new credit that someone may have, and the specific kinds of credit that are being used. Payment history will account for 35 percent of this score, 30 percent coming from the amount of debt outstanding, 15 percent is how long your credit history is, 10 percent is for the new credit that may have recently occurred, and the last 10 percent is the kind of credit that is being used, combining to a 100 percent score.
When looking at the 35 percent payment history, it searches for any previous problems like delinquent payments, collection agencies that have had to be used, and even a bankruptcy filing. It reviews how you have paid your debts on all accounts. It does consider the amount of time that you had credit problems and how long it took you to overcome them. The higher number of credit problems you have had are going to lower your credit score significantly.
The next biggest consideration is what you have in your current debt status, how much you owe to those that have lent to you. Even though this is looking mainly at your debts now, it does look at other kinds of accounts that you have as well. This takes an overall look at your current financial circumstance, and significantly large amounts of debt will lower your score.
The length of time you maintain a good credit record, the higher your credit score is going to be. Someone who has not had any past due payments and is current with their payments for ten to fifteen years is going to have a higher score than someone who has only had good payments for a year or two. As well, a lower credit score is going to show if you continually apply for more and more credit as this is a sign that you have financial problems that are leading you to need more money and apply for more loans and credit. Every time you make an attempt to get more credit, your score is going to go down a bit.
When looking at the amount of credit cards a person owns the one that has just one or two is going to have a much higher score than a person who has ten or more.
Your credit score is going to be calculated by looking at only the items that come back from your credit report and there can be other items that a lender may consider. It's very imperative that a person continues to monitor their own credit score and find ways to improve it.