How Your Credit Score is Calculated
Your credit score is the only crucial piece of information left out of your credit reports, including your free yearly credit reports. Although most people know that their credit score is also their FICO score, few know what that means, and what it leaves out.
Your credit score is a number between 300 and 850 that represents to lenders your financial trustworthiness. Your credit score is based on a combination of factors, some of which may surprise you, that we've conveniently laid out for you below.
Here's how your credit score is calculated:
30% Amounts Owed - How stretched are you already? Are your credit cards maxed? Is that why you need more credit? Ideally, you want to show that you're using (read: owing) less than 30% of your available credit; or, put another way, that you still have 70% of your credit still available to you. This calculation is also called your Debt-to-Credit Limit Ratio.
This factor is one of the reasons why canceling your credit cards once you've paid off the balances in full is not always the best strategy. If, for example, you cancel a card with a high credit limit, you severely lower your available credit (your credit limit) and raise your Debt-to-Credit Limit which lowers your credit score.
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15% Length of Credit History - How long ago was it when you got your first credit card or loan (a student loan, maybe?). Many people are in the habit of canceling credit cards once they've paid off their balances in full, but if doing so shortens the length of your credit history, your credit score will be affected negatively, not positively, from the cancellation.
Length of credit history is calculated as an average, so if you're going to cancel a credit card, make sure it increases your average length of credit rather than decreases it.
10% New Credit - How many times have you applied for credit as of late? How many of your loans or credit cards are new in proportion to the overall length of your credit history. The rule here is - don't accept every good offer that you come across; they can all turn around to bite you in the end.
All three of the major credit bureaus - Experian, Transunion, and Equifax Credit Bureaus- calculate your credit score separately, though their individual systems for calculating your credit score are all mutually based on the original credit scorer - the Fair Isaac Company (or FICO) - who created credit scoring.
You can then either obtain your credit score from each of the bureaus separately - generally for a separate fee each time - or you can purchase your FICO credit score from Fair Isaac itself. Especially if you're applying for a mortgage, as 75% of mortgage decisions - yes or no - are based on your FICO score.
Interestingly enough, you can purchase your FICO credit score for $6.95 through the Equifax Credit Agency (but not at all from either of the other two). If you're in the middle of obtaining your free yearly credit report from Equifax, you will be given the option to buy your credit score as an add-on.
You can also buy your credit score while obtaining your free yearly credit report from Transunion, but the number given will be the credit bureau's own calculation of your FICO credit score, not your FICO score itself. Or you can simply go to www.Myfico.com and purchase all 3 credit scores for $45.
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