How Your Credit Score is Calculated

Your credit score is an important component of your overall financial life. The relative strength of your score can determine whether or not you’ll be approved for a home loan, car loan or credit cards, and is even being used by employers to influence their hiring decisions. If you’re like most consumers, many of your financial actions are done with the specific intent of raising or protecting your credit score.

Photo by Alan Cleaver.

Yet for an issue that is obviously of such importance, most people have a very unclear concept of exactly what variables are used by the three credit reporting agencies (Experian, Equifax and TransUnion). A common belief among consumers is that making their payments on time will keep their score high. However it turns out that timely payments contribute only about one third of the total when it is considered amongst all the factors that are used in determining a credit score. Even though the credit reporting agencies will not disclose the actual formulas that they use, key details about these formulas are known and can offer a much more complete idea of how scores are determined.

Basically there are five variables that are used in determining a credit score. In addition to knowing these variables, we also know how heavily each one of these variables is weighted relative to one another. When taken together, this knowledge can go a long way in indicating what specific financial actions are likely to raise or lower your score, and also by how much, relative to other actions. So while we can’t duplicate the actual scoring of the credit reporting agencies, we do have a good idea of the logic used in determining a credit score.

Variables and % Weights

Below are the five variables and percentage weights used to calculate your credit score:

Timely payments on your bills (35%)
The unused proportion of your total credit available (30%)
The age of your accounts (15%)
Types of accounts, whether revolving or installment (10%)
Recent requests for new credit (10%)

In analyzing the above information, it can be seen that paying your bills on time is the single most important action you can make to raise or maintain your score. However it becomes equally apparent that the other four variables heavily outweigh the importance of timely payments (65 percent to 35 percent), so it is a mistaken notion that timely payments alone will guarantee a high score. On the other hand, you can be certain that numerous late payments will limit how high your score can go, even if the other four variables are very strong.

If you have concerns about your credit score and the impact that a debt relief program may have on it, speak with an experienced debt professional. They have the knowledge and experience to advise you in selecting the best debt solution for your circumstances.