How your credit score is calculated

Credit score calculating is not easy, it involves complex formula. It is based on lots of information. There are infinite number of factors that the FICO score is based on. The basic purpose behind this that you should handle your credit more responsibly.

It’s usually easier to loose your points, but difficult to get it back. So you should always consider improving your score and protect them at the same time. The penalty is high if you have high score and any mistake.

The following five are the major factors that affect your credit score according to their relative level of importance. The level of importance varies with the individual score.

1. Your Payment History

This contributes about 35 percent of your credit score. Your payment history shows how responsible you are with your credit. Lenders wants to know how good you are in paying bills on time and more consistently. If you have never been late, you clean history will help maintaining good score.

2. How much you owe

This makes up about 30 percent of your score. The score is based on the total amount you owed on all accounts and how much you owe in different kind of account like credit card, personal loan, mortgage etc. The higher difference between your balance and limit, is better for your credit score.

3. How long you have had credit

This is around 15 percent of your total score. This relatively less important as compared to the previous two factors. You may have good score with a short history, but if you can maintain it for long run, that’s better. The score considers the age of your oldest account and the average age of all your accounts.

4. Your last application for credit

This is 10 percent of your overall credit score. Opening new account can lower your credit score. Opening too many accounts in short time is considered as negative sign for your financial situation.

5. The types of credit you use

This constitutes around 10 percent of your score. The FICO score gives importance on combination of different types of credit. It’s better to have mix of revolving debt like credit card and installment debt like auto loan, mortgages etc.