There are several different credit scoring models used by lenders and credit reporting agencies to calculate a credit score, but the most widely used is the FICO credit score. FICO scores range from 300 to 850, with higher scores indicating a lower risk of default. Here is a general overview of how the FICO credit scoring model calculates a credit score:
- Payment history: This accounts for 35% of your credit score and reflects your history of making on-time payments on your debts. Late or missed payments can have a negative impact on your credit score, while a history of consistently making on-time payments can help boost your score.
- Credit utilization: This accounts for 30% of your credit score and reflects the amount of credit you are using relative to your credit limit. It’s generally recommended to keep your credit utilization below 30%, as using too much of your available credit can have a negative impact on your credit score.
- Length of credit history: This accounts for 15% of your credit score and reflects the age of your credit accounts and the length of time you have been using credit. Having a longer credit history can help improve your credit score, as it demonstrates to lenders that you have a track record of responsibly managing your debts.
- Credit mix: This accounts for 10% of your credit score and reflects the types of credit accounts you have, such as credit cards, loans, and mortgages. Having a diverse mix of credit accounts can help improve your credit score, as it demonstrates to lenders that you have experience managing different types of credit.
- New credit: This accounts for 10% of your credit score and reflects any new credit accounts you have opened or credit inquiries you have made. Applying for too much new credit in a short period of time can have a negative impact on your credit score, as it may indicate to lenders that you are taking on more debt than you can handle.
It’s important to note that the exact formula used to calculate a credit score can vary depending on the credit scoring model and the specific credit reporting agency. Additionally, credit scores are based on the information in your credit report, which is compiled by credit reporting agencies based on data from your creditors. To maintain a good credit score, it’s important to manage your debts responsibly and monitor your credit report to ensure that the information it contains is accurate and up-to-date.