5 Ways FICO Calculates Your Credit Score

A credit score is a three-digit number that identifies how risky you are to a lender.

One Little Three-Digit Number

You may not even know you have one. If you have a utility (electricity, phone, etc.) account, a credit card, a student loan, a car payment or a mortgage, you’ve got one. You’ve got a credit score!

Think of this three-digit number, your credit score, as a snapshot of your credit report. Compare it to your high school or college grade point average (GPA) as being a snapshot of your transcript. This three-digit number helps a lender determine your creditworthiness as they evaluate extending credit to you when you apply for a credit card, a car loan, a student loan or a mortgage. The higher your credit score, the more likely you are to be granted credit and receive the best possible interest rate. 

The most popular credit score used in the world today is the FICO(R) score. A fun trivia fact – FICO stands for Fair Isaac & Company, the company who created the FICO score! A FICO score ranges from a low of 300 to a high of a perfect score of 850. It is estimated over 90% of lenders use FICO scores when evaluating creditworthiness. A FICO credit score is calculated based on five specific factors: 

  • 35% Payment History: Payment history helps a lender figure out the amount of risk for future credit. Be sure to keep all your credit accounts in good standing.
  • 30% Amount Owed: Having credit accounts and owing money on them does not mean you are a high-risk borrower. Using a lot of your available credit, may indicate that you are overextended..
  • 15% Credit history: This takes into account: how long your credit accounts have been established, and how long it has been since you used certain accounts. 
  • 10% New Credit: Lenders consider that opening several credit accounts in a short amount of time represents a greater risk, especially for people who don’t have a long credit history.
  • 10% Credit Mix: This refers to the different types of credit you are using including: credit cards, retail accounts, installment loans, finance company accounts, car loans, and mortgage loans. 

With the single largest factor in determining your credit score being Payment History (35%). To keep your credit score as high as possible, it’s important to consistently pay your bills on-time. Here are three great ways to successfully pay your bills on time:

  1. Get organized! Make a list of all bills, due dates and amounts owed and put in (or on) your calendar. Go old-school and use a spreadsheet if it’s easier!
  2. Sign up for reminders (or use an app!) of upcoming or regular payments. 
  3. Set up automatic payments through your bank. 

A Journey to Personal Financial Success

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