An individuals credit score is calculated using a statistical model. The large banks and insurance companies usually have their own ‘in house’ calculator. In common with the majority of businesses they also use FICO models. These were created by the Fair Isaak Corporation, founded in 1956. They are probably the best known and most used credit-scoring formulae in the world. Fair Isaak offers specific scoring models for the US, Canada and South America and offers ‘Global FICO’ for many other countries.
In order to decide whether an applicant qualifies for credit, lenders check the individual’s credit report. Based on their previous credit history and other factors, the lender decides on the likelihood of the person concerned being able to meet any credit commitments in the future. All lenders have access to credit reports.
Know Your Credit Score
You can have a free copy of your credit report from one of the three main US reporting companies, TransUnion, Equifax or Experian.
However, a detailed report, which shows and calculates credit scores will cost a small fee. You can also register with a monitoring company online. Get your free credit report online.
Credit Score Formula
The exact formula for calculating credit score is not revealed but the following elements do apply. The percentages are approximate.
- 35% – Payment punctuality
- 30% – Ratio between current debt and total available credit
- 15% – Credit history length
- 10% – Credits category (i.e. type of credit agreements entered into)
- 10% – Recent credits
The percentages given above provide a vague idea of what factors are influencing your credit score. For instance the 10% value given for types of credit taken in past, does not tell you what mix of credit in the past is going to be most beneficial to you. Foreclosures, judgements and many other factors can also influence your score.
All credit-scoring models are subject to Federal regulations. The Equal Opportunity Act prepared by Federal Reserve Board prohibits any form of scoring which considers factors such as race, religion, colour, sex or marital status. In addition, when somebody fails to achieve a score that results in a successful credit application the Board requires that the individual be given a specific reason for their failure.
An individual’s score can vary between 300 and 850 points. 660 points is typically seen as an important threshold when assessing a person’s credit worthiness. As each individual has three scores (one from each of the main reporting agencies) many lenders will check each score to establish an average.
Improving Your Credit
Your credit score can be improved if you:
- Always pay your bills on time
- Have at least 3-6 open and active credit accounts
- Have 1-2 loans
- Keep your credit card balances low
- Keep your accounts open for a long time
- Have a stable record of credit use
- Avoid too many applications for new credit
However, your credit score will decrease if you are late paying bills. Have either too many or too few accounts or max out your credit cards. Your score is also affected if you have a short credit record or make a large number of credit account applications.