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 How is my credit score calculated? |
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| The calculation of your credit rating score is dependent on over 20 elements of financial and spending information. In order to determine your credit risk, lenders rely on your credit report and its associated FICO score that ranges from a high 850 to low 350. Three credit rating score are calculated by the 3 main agencies Experian, Equifax and TransUnion, each using a different algorithm in the scores computation, but they all rely on very similar information. These are the important facts and figures on the calculation of your FICO score: |
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Elements of the credit score computation |
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| To determine the financial risk when lending you money, lenders use a common denominator to evaluate and calculate your risk factor, or the likelihood you will default on your payments or repayments of your borrowings. The 3 Fico scores that are calculated from Experian, Equifax and TransUnion will significantly effect your chances of credit approval, borrowing power and interest rate levels when applying for a credit card, car loan, mortgage or personal loan. The FICO scores use your spending data organised in 5 categories and broken down as follows to calculate your credit rating score: |
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Negative public records are taken into the calculation by all credit score algorithms such as judgements delinquency, collection statements and bankruptcy.
How long past due dates are past and the number of due items and accounts are key in the computation of your credit rating. The most recent activity has greater mathematical weight in the scoring calculation, so paying bills on time is a positive while delays on a consistent basis are bad |
| Questions like these will determine whether you need the minimum 2/3 hours of weekly fitness exercise or 5 to 7 if you are couch or chair bound all day. |
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| Total outstanding loans and owed amounts |
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The aggregation of owed amounts and plays 30% of the role in the calculation of your credit score. All financial debt and amounts owed in pretty much all your accounts play a significant role.
The amount of credit you have versus the amount you use. This ratio play strongly the in the scores calculation. If you have 10 credit cards that are maxed out, and you only pay the minimum monthly amounts, you present a risk and the credit scores algorithms treat this as a negative and decrease your score. The number of credit facilities that you have, the number of credit cards, personal loans and amount of borrowing power you have is inputted in the denominator of the formula.
In essence, using a portion only of the total borrowing power is good for the math of the score and Experian TransUnion and Equifax all factor these elements in their algorithms to determine the output figures. |
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| Length of credit history in the calculation of the FICO credit rating score |
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| Accounting for 15% in the formula, credit history is important to the algorithm. Notably if you have a long history with the same credit card companies, with the same credit issuers and banks. The formula includes the time since the accounts have been opened and their age as well as the amount of activity it has had and the account types. |
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| Total outstanding loans and owed amounts |
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| Used for 10% of the calculation of the credit score the number of credit enquiries and applications is important. The algorithms do weed out comparative shopping activities when people are in the process of buying a car or a house and they want to shop for the best mortgage deals and lowest interest rates. That said. This score does raise alarm bells to creditors when a flurry of enquiries happen for individuals with past history of defaulting on debts, loans and payments and bankruptcy. So the mathematical scoring model compensates but it is important to monitor your credit reports on a regular basis as results can vary from the reporting companies Experian, TransUnion and Equifax FICO calculation models. |
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| Variety of credits and loans in the calculation of your debt handling maturity |
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| The variety of loans, credit cards, personal debt and mortgage is an exponential factor in calculating your score. The algorithm uses the diversity of your debt combined with payment history and health to combine the factors to a ratio that highlights your debt responsibility levels. It shows your ability and maturity for handling a variety of debt revolving credit like credit cards or instalment payments as those used for personal loans, mortgagees and car loans. So having debt and loans and paying them on time impact a number of factors used alone or in combination to calculate your credit score. |
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| Such things as your age race and sex are not factors in the algorithm and formula that determines your financial worthiness. Nor does for that matter your employment status and how long you have been with an employer. Your income marital status and educations are not included in the formulas either. Time at a current address or whether you own or rent a flat or house is also irrelevant and left out of the equation. If you have been turned down when applying for credit is not equated though the number of times you do apply for credits can come in play. |
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Payment story
Amounts owned
Length of credit history
New credit
Types of credit used
