How Are Credit Scores Calculated?

for most of us our credit scores

determine everything about our lives

they determine whether we get to get

that new car or not

whether we get to get a house how much

interest we may pay on that house or

whether we can get loans when we hit a

rough patch having a good credit score

can change your life and conversely a

bad one can ruin it so how are these

life defining financial scores actually

calculated well the first thing to

discuss is that you don't have just one

credit score rather you have three main

ones Equifax Experian and TransUnion

your score can vary minorly or even by

tens to twenty to thirty points between

these three credit bureaus simply due to

how they calculate the scores and what's

reported to them like missed payments

there's also an agency called FICO that

provides credit scores as well as one

called vantage score each one of these

credit agencies calculate their scores

independently on their own scales and

lenders like banks can choose which

scores they want to consider to evaluate


in general the biggest factors that will

affect your credit scores are the number

of payments you have in your name the

type of accounts you have like auto

loans or credit cards how much credit

you're using versus how much credit you

have how long you've had your credit for

and your payment history on all credit

lines the best way to think of credit

scores are that there are numerical

measures of how good of an idea it is to

loan you money if you went to a bank and

asked them for fifty thousand dollars in

loans they need some way to evaluate how

likely you will be to pay them back

other than yo I'm good for it each of

the different variables we mentioned has

different weights depending upon the

formula being used the specifics of

which are kept secret by each agency

that said generally the most important

factor that goes into calculating your

credit score is payment history as you

can probably guess looking back at how

well you stayed on top of making

payments is a pretty good indicator of

how likely you will be to make your

payments on time in the future if you

apply for an auto loan a lender might

choose to wait your auto payment history

higher than say your credit card history

stepping back for a moment to the

formula for the overall score while many

agencies keep their exact formulas

secret we can at least know the weight

of each category in FICO scores which

generally carries over to the other

scores since they make that data public

payment history is weighted at 35

percent followed by amounts owed at 30

percent then length of credit history is

15 percent new credit is 10 percent in

credit mix is 10 percent as well your

payment history is simple have you

missed payments if so how many four

amounts owed lenders will look at your

debt to income ratio or the ratio of how

much debt you pay off each month versus

how much money you're bringing in in

general you want to keep this ratio

under 43 percent on the very high side

the lower you are the better off you are

length of credit and new credit

categories should be pretty

self-explanatory do you have a good

track record of managing money then have

you recently started taking a bunch of

new loans signaling possible

unresponsible spending lastly while not

weighted that heavily lenders do also

want to see a good mix of accounts auto

lenders will want to see you having

managed an auto loan before credit

lenders will want to see good credit

card history and also see that other

lenders have extended you credit through

cards too it's essentially a measure of

how alone am I in giving this person

money have other people done it and I

guess if they have then I'll do it too

now that we grasp how these scores are

calculated or at least what goes into

each score and how that information is

weighted we can understand the best way

to improve credit if you want to improve

credit fast or really just as fast as

possible you'll want to start with the

high value categories start making your

payments on time pay down your overall

loans and just start being responsible

with your credit soon enough your credit

will start improving also be sure to

check your credit report for free on

various websites it will help you track

your progress and ensure no one took out

a loan in your name so that's how the

all-important credit score is calculated

it can be an unclear process since

companies keep a lot secret but in

general you'll set yourself

for success if you pay attention to all

of the categories we've just mentioned