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How the Credit Bureaus Calculate Your FICO Score

Although various types of credit scoring formulas exist for calculating that magic number that determines your ability to secure financing, the most widely used credit score is the FICO score. The FICO formula is owned by the Fair Isaac Corporation and is used by the credit bureaus to calculate the credit scores that are released to lenders. The exact formula for calculating credit scores is a trade secret. The Fair Isaac Corporation has, however, released its basic scoring model to the public. By knowing the factors that affect your FICO scores, you can work to improve them.

Payment History

Your payment history makes up 35% of your score. This encompasses the payments you make on your debts and if those payments are made on time and as agreed. Because your payment history has such a significant effect on your credit score, missing even one payment on a debt can hurt you. The more payments you miss, the greater the negative impact on your credit score will be. Delinquent debts on which you have stopped making payments are also factored into your payment history.

Types of Accounts

There are two types of primary accounts: revolving accounts and installment accounts. Credit card accounts and lines of credit are revolving accounts while an installment account is any type of debt that you pay for in set installments over time. A mortgage debt or vehicle loan would appear on your credit report as an installment account. The types of debt you carry account for 10% of your overall credit score. For the highest possible score, it is best to have both installment and revolving accounts reflected on your credit report.+

Length of Time You've Had Credit

Although it is possible to have a good credit score while also having a short credit history, the length of your credit history makes up 15% of your score. Your credit history is determined by the age of your oldest open account. The longer you have had credit, the better off you are. Thus, canceling an old credit card could hurt your credit score.

How Much You Owe

The amount you owe to your creditors makes up 30% of your credit score. This is calculated by reviewing your revolving and installment accounts and how much you owe on each type of account. Installment accounts and revolving accounts, however, are scored differently. You are expected to have a fairly high balance on your installment accounts since you are paying off a preset amount. Your revolving accounts reflect only the balance that you have charged. The lower your balance on your credit cards, the higher you can reasonably expect your credit score to be.

The spending limit on your credit cards also comes into play. The FICO scoring formula considers the amount you owe on your credit cards in relation to how much the credit card company permits you to charge. A low balance and high spending limit will result in a higher score than a high balance and a low limit.

Recent Credit Transactions

Your recent activity makes up 10% of your credit score. This applies to new accounts you have opened, how many new accounts you have opened, and the credit inquiries associated with those accounts. Credit inquiries occur when a potential lender reviews your credit report. Numerous inquiries over a short time period can hurt your credit score.

The credit bureaus also factor in your payment patterns. If you had credit trouble in the past, yet have made an honest effort to pay your creditors on time and manage your debt wisely, this will be taken into consideration when your recent credit transactions are scored.

Your FICO score may be a starting point for lenders to get a good idea of whether or not you can be depended upon to pay your debts, but many other factors go into a credit or loan approval. In addition, not all lenders will review your FICO scores. Even if you are reasonably certain that you won't be applying for new credit any time soon, it is a good idea to monitor your credit reports as often as you can to ensure that all of your accounts are reporting correctly and your credit file does not contain errors.