How Your Credit Score is Compiled

By now, you probably know what your credit score is. You may even know how you got to that magical number. But, do you know how your credit score is compiled? What contributes to the fluctuation of that number, and who is responsible for inventing the number to begin with? Since we rely upon credit for homes, cars, computers, student loans, and many other things, understanding your credit score is crucial.

When you ask for your credit score, you will be given a three digit number. While there are a couple of different methods that lenders use to determine your score, most of them use the FICO method. FICO stands for Fair Isaac Corporation – which happens to be the very corporation that made these scores public. You see, awhile ago, your credit score was only available to lenders. Today (thanks to FICO), you can now access your own score.

Interestingly, the mathematical method for determining your FICO score is owned by Fair Isaac…and they will not reveal this method. However, your score is roughly based upon the follow measures.

  • 35% of that number is derived from your monthly payment history. When you skip a payment, make a late payment, or are notified by a collection agency, this score changes.
  • 30% of your number is derived from the amount of outstanding debt that you currently have. Things such as car payments, home payments, and the number of credit card that you have will impact this score.
  • 15% is taken from the length of time that you have been eligible for credit. Basically, the longer you have had credit, the better your score should be.
  • 10% is derived from new credit that you may have. If you open a new credit line, this will have a negative impact on your score (until you can prove that you will pay those bills on time).
  • 10% is derived from the kind of credit that you currently have. It is best to have numerous types of credit in order to increase this score.

Now that you know how your credit score is compiled, you can start working towards a better credit score. This three digit number might seem like a pain, but just remember that a few years ago you wouldn’t have known your number at all. I usually recommend to get your credit score from all 3 credit bureaus. Services like GoFreeCredit offer a free credit report and credit score combined.