How Are Credit Scores Calculated?

Date: Sep 05 2018

Several things are taken into account when your credit score is calculated. To have a better understanding how it works, please visit us at www.santoslawpa.com to continue reading.

In 1956 Fair Isaac and Company developed a mathematical model to help them determine which borrowers could be trusted to pay their loans back. They used the borrowers’ history to determine the risk of lending to that person. Soon thereafter they developed the FICO Score which was later adopted by the three reporting agencies, Equifax, TransUnion and Experian.

The FICO score is between 300 and 850. This number indicates how save it is to lend money to a particular person. The higher the FICO score the more likely creditors will lend you money with more favorable terms. The lower the FICO score the less likely creditors will lend you money and if they do the repayment terms are much less favorable.

Your credit score only reflects your past relationship to debt. So whenever a payment is made your creditor will report it to the three credit bureaus. But not all information is reported equally. The largest percentage of your FICO score is based on your payment history, so missing a payment is one of the worst things you can do. Late payments are also bad but not as bad as missing a payment. Another big percentage of your FICO score is based on your credit to debt ratio. You want to keep your credit to debt ration under 25%, that’s why paying down your balances can help your score. Also, the length of your credit history is another category that makes up a big part of your FICO score. This is based on the ages of your accounts. The longer you have the accounts the more likely your score will be higher (so long as you are in good standing of course). Additionally, the type of credit that you have affects your FICO Score. There are three main credit types, credit cards, installments (like student loans or auto loans), and mortgages. The best way is to have combination of all three of the main credit types. Finally, another category in your FICO score is new lines of credit or credit pulls. So if you open too many accounts at the same time or several lenders check your score within a recent time this can negatively impact your score.

Remember your credit score is not the end all be all of financial health, but a good credit score can help you achieve many goals, like owning a home or business. If you want to know your credit score, many credit companies will provide it in your monthly statement. You can also request a copy of your credit report from the three credit bureaus for free once every 12 months by visiting www.annualcreditreport.com.

If you have additional questions about your credit score or your credit report, please contact us at The Santos Law Offices, PAfor more information. Call 305-417-4111 for a free consultation.

This information is provided for educational or informational purposes only and should not be construed as legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice.