How Your Credit Score Is Calculated

A credit score is a numerical representation of how credit-worthy you are. In other words, it’s a number that says how likely a lending organization thinks it is that you will repay a loan.

It’s hard to develop a plan to improve your credit score if you don’t understand what factors influence your credit scores. The exact calculation is a secret, but certain aspects of your financial life affect your score in predictable ways.

Fair Isaac Corporation is the most respected provider of credit scores. You can find their website at: www.myfico.com.

Your credit score has 5 components:
  1. Payment History (35%): This is simply a question of whether or not you make your payments on time. The more current the information, the more it will count toward your credit score. So being 90-days late right now is worse than having been 90-days late last year.
  2. Amounts Owed (30%): This is mostly your credit utilization. How much of the credit available to you in your current accounts are you currently using? The less, the better.
  3. Length of Credit History (15%): The longer, the better. For example, having an account for several years has more of a positive impact than having only 6 months of credit history.
  4. New Credit (10%)What percentage of your accounts are new accounts? It sends up red flags and lowers your score if you’re getting a lot of new credit.
  5. Types of Credit (10%): It helps your credit score if you have a variety of types of credit. A mortgage, car loan, and credit card are more favorable than 3 credit cards.

Credit scores range from 300 to 850. Keep in mind that you have 3 credit scores, one from each of the 3 major credit bureaus. A decent credit score from the bank’s perspective is about 680.

We offer a Credit Improvement Program to help our clients improve their credit scores.  The goal of our program is to help clients improve their credit scores so that only 2 years after filing bankruptcy, they can qualify for a regular interest home or car loan.  However, anyone wanting to improve their credit score can benefit from the program, even those who do not need to file bankruptcy.  If you’d like more information on how to improve your credit score, give our office a call today.


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