Improve Credit Score By Understanding The Credit Score Formula

Credit Score Formula

Credit Score Formula

* 35% - Late or missed payment - Do you pay your bills on time?

* 30% - Debt amount - How much do you owe to each of your current lenders and how much of a credit limit do you have with them? How close to your credit limits are you?

* 15% - Credit history - How long have you had each account?

* 10% - Kinds of debt - What kinds of debt do you have? Home loans, credit card debt, payday loans

* 10% - Credit report inquiries - How many new accounts or queries have you had?

Understanding Credit Score Formula

As you can see above the FICO score formula consists of 5 parts. In order to improve your credit score you have to improve each part of the formula, but certain factors are given more weight than others.

The first thing to think about is what is the purpose of the credit score. Lenders use the credit score to determine how likely it is that you will repay your next loan on time. The credit score formula focuses on 5 factors indicative of whether a loan will be repaid.

Payment History

The first part of the credit score formula is whether you pay your bills on time. Over one-third of the score is based around this factor and for good reason. There is no better indicator for a lender on whether he is going to be repaid on time than whether you are paying your other lenders in a timely fashion.

Amount Currently Borrowed

The second most important credit score factor is the amount of money you currently owe to each of your creditors and the amount they are still willing to lend you (your current credit limit). The more debt you have, the higher the risk for a new lender that you will not be able to make your debt payments.

Credit History

The third factor looks at how long you have had each account. Lenders like to see borrowers who have a long credit history because this tells them that the data for the other credit score factors is more relevant.

Credit Types

The fourth factor is the type of debt you currently have outstanding. If you have secured loans like home mortgages, unsecured creditors know that they will be behind the secured home loan company in a bankruptcy. Additionally, if someone has a lot of credit card debt, another creditor might be hesitant to extend more unsecured credit.

Credit Score Checks

If there are recent credit report inquiries being made with the credit bureaus, creditors know that you are trying to obtain more credit. This is concerning to a creditor because that creditor knows your current list of creditors, but it doesn't know if someone else is going to extend more credit to you shortly which could raise the risk of non-repayment for the creditor.

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by: James Harty

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