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How Your FICO Credit Score is Calculated
Welcome to WesBanco Wellness: a Series for Your Financial Health. Here we will tackle budgeting, debts, safe web practices and more to help get you into the best financial shape of your life.
How Is Your FICO Credit Score Calculated?
Have you ever wondered why your credit score is important or how your FICO credit score is calculated? WesBanco Wellness is here to help. We’ll break down how your credit score works, how it impacts your financial future and the steps you can take to avoid costly credit mistakes.
Your credit score, also called a FICO score, is an actual number, between 300 and 850. The higher the number, the better your score. For example, a score of 740 to 799 is considered very good, though the average is closer to 700.
So, what exactly is FICO and why is it a big deal when it comes to credit? FICO is an acronym for Fair Isaac & Co., the company that is responsible for tabulating your credit score.
Today, we have three main credit agencies that calculate individual credit reports: Experian, Equifax and TransUnion. Each of the three main credit agencies calculate your personal credit score based on your credit report at that individual agency. Each agency has over 200 million credit history files for individuals who have borrowed in the past. 4.5 billion of those files are updated every month. The agencies tend to have different information in their files, which means your credit report and score will vary from agency to agency.
Those credit scores are what potential creditors, landlords, employers and insurers look at for an instant judgment on your creditworthiness. Creditworthiness implies how likely you are to pay back what you borrow based on your history. That’s why better credit reports and higher credit scores make it easier and cheaper to borrow. It also makes it easier to rent an apartment or buy a house, get a job, purchase insurance, open a credit card and more.
The Sources of Data Used to Calculate Your Credit Score
Credit scores are calculated using the results of a compilation of several different sources of data that are available in your credit report. That data falls into five distinct categories, which are listed in order of how much weight they usually have in informing your score:
- Payment history
- Amounts owed
- Length of credit history
- Credit mix
- New credit
You’ve heard before that paying credit card bills and loans on time is crucial, and the list above is why. Your payment history is the single most important factor in determining your credit score. Your history is affected and noted in your score whether you pay on time, make full or partial payments, miss a payment or submit a late payment.
Two Ways to Avoid a Bad Credit Score
There are two common ways that your credit score can be impacted in a bad way. The first is not using credit responsibly, which happens often with misusing credit cards. That means spending more than you can afford, not paying your bill on time and having too much outstanding credit. That outstanding credit is often spread across multiple credit card accounts. Credit cards are a great way to build your credit score when used responsibly. Learn more about the best ways to use your credit here.
Another way that you may have a low credit score is if you don’t use credit at all. Maybe you’ve never needed to borrow money or weren’t interested in opening a credit card. That means you won’t have a credit history, so borrowers can’t determine how likely you are to pay back what you borrow.
So, if you’re looking to build your credit score, start small by opening a credit card and paying off the balance in full every month. After a few months of making small charges and paying them off, you’ll start to see your score soar. That’s the thing about credit, you have to use it to build it.
It’s All About the Numbers
When it comes to your credit score, the agencies don’t look at gender, race, religion, medical history or even your lifestyle when calculating your score. They also don’t have any information or data regarding your personal checking and savings accounts including any investment accounts. It’s all about how you use the credit you borrow and how consistent you are with paying down the balance.
Content is for informational purposes only and is not intended to provide legal or financial advice. The views and opinions expressed are those of the author.
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