How your credit score is calculated?

In the currently financial world, a credit score is like a report for your financial behavior and its main job is to tell lenders and landlords how responsible you are with money.

Usually ranging from 300 to 850, the individual credit score punctuation is carefully calculated based on five major factors and can have a huge impact on your life.

Understanding the how the credit score system works can help you build a better situation, thus allowing a brighter financial future.

But how exactly a credit score is calculated?

Credit scores are generated by reporting agencies or credit bureaus. Those agencies and bureaus would receive an individual’s payment behavior, bills history, and several credit related information from associated banks and financial institutions.

But independently of the credit agency or bureau, the credit score is calculated based on five major factors, each of which plays a significant role in determining an individual’s creditworthiness. These factors are:

Payment History

This is the most critical factor, accounting for about 35% of the credit score. It reflects whether you have paid your bills, loans, and credit card payments on time. Consistent on-time payments positively impact your credit score, while late or missed payments can lower it.

Credit Utilization

This factor makes up about 30% of the credit score. It measures the amount of credit you are currently using compared to your total available credit. Keeping your credit card balances low relative to your credit limits can improve your credit score.

Length of Credit History

This factor constitutes approximately 15% of the credit score. It looks at how long you’ve had credit accounts open. A longer credit history tends to be more favorable as it provides a better picture of your credit management over time.

New Credit

About 10% of the credit score is influenced by new credit applications and accounts. Opening multiple new credit accounts in a short period may suggest financial instability and could negatively impact your credit score.

Credit Mix

This factor also contributes around 10% to the credit score. It considers the various types of credit you have, such as credit cards, installment loans, mortgages, etc. A diverse credit mix may positively influence your score, as it shows you can handle different types of credit responsibly.

These five factors, together with some other minor considerations, are used by credit scoring models like FICO to calculate an individual’s credit score.

 It’s essential to understand these factors to manage your credit responsibly and maintain a good credit score, which can open doors to better financial opportunities.

Why can I have different credit score punctuations?

It is possible to have different credit scores from various sources. That happens because several there is more than one company providing credit score punctuations to banks and financial institutions.

Among these companies, the big names used by today’s market are FICO are VantageScore. Although these companies uses the same data, they weight these information slightly differently.

FICO vs VantageScore

FICO scores have been around for a long time and are widely recognized and trusted by lenders. They range from 300 to 850, with higher scores indicating better credit.

At the same time, VantageScore is a newer model jointly developed by the three major credit bureaus. Like FICO scores, VantageScores range from 300 to 850.

While both models consider similar factors like payment history and credit utilization, VantageScore claims to be more inclusive by considering a broader range of credit data.

Overall, both scores can provide valuable insights into your credit health, and it’s essential to monitor and maintain good credit habits regardless of which model lenders use.

It is important to notice that if you have an excellent VantageScore, your FICO is likely to be high as well.

Written by

Alexandre Marcos