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Understanding the factors that affect your credit score can help you improve your score over time. Here’s what you need to know about how credit scores are calculated.By Julie Anderson | American Express Credit Intel Freelance Contributor 8 Min Read | December 15, 2021 in Credit Score
At-A-GlanceYour credit score is calculated using your past payment patterns, how much of your credit you’re using, how long you’ve had credit, and your credit mix. Lenders report your loan payment behavior to the three national credit bureaus, which create a credit report. Credit scoring algorithms calculate your credit scores using the information in those credit reports. What Information Is in a Credit Report?As you make monthly payments on your credit card, auto loan, mortgage, or any other debt, your lenders report those payments and the amounts owed to the three major credit reporting agencies: Equifax, Experian, and TransUnion. From this information, the credit bureaus create a credit report. The information in that credit report is then used in proprietary algorithms by FICO or VantageScore to calculate your credit score.
Your credit reports from the three bureaus may vary slightly, because lenders sometimes send reports to only one or two of the credit bureaus. Recognizing this, mortgage companies typically pull all three credit scores but use only the middle value. Did you know? As an added security measure to help protect against fraud, American Express reports a reference number to credit bureaus – instead of your actual account number. What Is a Credit Score Based On?The most commonly used credit scoring models are from FICO, which is used for the majority of lending decisions, and VantageScore, which is a collaboration of the three credit bureaus. Both companies use proprietary algorithms that result in scores ranging from 300 to 850. The average FICO credit score was 716 in 2021.1 Although the algorithms vary, the two companies consider these five factors in their calculations:
How much each these factors influence your FICO credit score is shown in the accompanying pie chart.2 Payment History Carries the Most Weight in Credit Score CalculationsAt 35%, payment history carries the most weight because it shows how well you’ve managed your credit in the past. Types of accounts considered in payment history include credit cards, auto loans, retail store credit, student loans, personal loans, mortgages, and home equity lines. If you have any bankruptcies, foreclosures, or accounts turned over to collection agencies, these will negatively affect your score. Late payments, defined as more than 30 days late, and missed payments can stay on your credit report for seven years. Because payment history plays such a large part in credit score calculations, paying at least the minimum amount, on time, for every credit card or other debt can help you get and keep your credit score in a good or better range. If you know you’ll miss a payment, contacting your lender in advance may get you some extra time without negatively affecting your credit score. Amount of Available Credit Is Next in Credit Score CalculationsAt 30%, the amount you owe compared to your credit limit is a close second to payment history. To see how this calculation works, consider this: If one of your credit cards has a credit limit of $5,000 and a second card has a credit limit of $7,000, your total available credit is $12,000. If you currently owe $500 on the first card and $300 on the second card, your total usage is $800, meaning that you’re using only 6.6% of your available credit. The general rule of thumb is that if you use more than 30% of your credit limit, your score will begin falling. The way this part of the calculation works means that closing a credit card you’re not using could actually lower your credit score, because your total credit limit would be reduced.
Your Old Active Accounts Are FriendsThe length of credit history category simply measures how long you’ve had credit. Particularly important is the age of your oldest active account. That means that keeping your oldest credit card account open, even if it is not used, can have a positive effect on your credit score. New Credit and Credit Mix Are Smaller, but Still Important, InfluencesAt 10% each, these factors contribute less to your credit score, but shouldn’t be ignored. New credit is a measure of the number of new accounts you’ve opened recently. Although new accounts increase your available credit, opening too many new accounts in a short period sends a red flag to creditors.
What Is Not Measured in a Credit Score?Some of what’s not measured in credit score calculations include your income, how long you’ve worked at your job, and how long you’ve lived in your house. Still, lenders may consider these factors separately in determining your creditworthiness. Industry-specific Scores Are Tailored to the Type of Loan RequestedDepending on the type of loan, lenders may use an industry-specific FICO score tailored to that type of credit. For example, lenders usually use the FICO Auto Score algorithm when deciding on auto loans, while credit card companies often base decisions on the FICO Bankcard Score algorithm. These industry-specific calculations weight your success with similar loans more heavily and result in scores with a wider range – from 250 to 900 – than the base FICO score.3 The TakeawayCredit score calculations are based on five areas of credit behavior: payment history, credit utilization, how long you’ve been using credit, the mix of credit types you use, and how much new credit you’ve applied for lately. To improve your credit score, experts advise you to pay credit cards and loans on time, use only 30% or less of your available credit, keep old accounts open, get a mix of loan types, and open new accounts wisely. Julie Anderson is a freelance writer with extensive writing and teaching experience in the technology field. All Credit Intel content is written by freelance authors and
commissioned and paid for by American Express. The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors. What carries the most weight when calculating a FICO score?The most important factor of your FICO® Score☉ , used by 90% of top lenders, is your payment history, or how you've managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you're using—on your credit accounts. The three other factors carry less weight.
What component has the largest impact on your FICO score?Payment history has the biggest impact on your credit score, making up 35% of your FICO score. Credit utilization ratio comes in at a close second, accounting for 30% of your score. The higher your credit score, the more likely you are to qualify for credit – and receive better terms and interest rates.
What are the components of a FICO score?The main categories considered are a person's payment history (35%), amounts owed (30%), length of credit history (15%), new credit accounts (10%), and types of credit used (10%). FICO scores are available from each of the three major credit bureaus, based on information contained in consumers' credit reports.
What are the 2 largest factors that determine your FICO credit score?The top two factors that determine your FICO score are your history of paying back what you owe and how much you owe compared to your credit limits.
What is the most commonly used FICO score model?The most widely used model is FICO 8, though the company has also created FICO 9 and FICO 10 Suite, which consists of FICO 10 and FICO 10T. There are also older versions of the score that are still used in specific lending scenarios, such as for mortgages and car loans.
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