The New Formula for Calculating Your Credit Score | CreditShout

The New Formula for Calculating Your Credit Score

By Kevin / June 1, 2011


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You have seen all the commercial ads on television on the importance of knowing your credit score and staying on top of it. If you have rented an apartment, bought cell phone service, applied for a job that involved handling a lot of money, or needed to get utilities connected, there is a good chance your score was accessed. But just how do the credit agencies calculate those scores that can make or break your ability to obtain credit?

Your basic credit score is calculated electronically by Fair Isaac Corporation and is called a FICO score. The three national credit bureaus use their own version of the FICO scoring method — Equifax has the BEACON score, Experian has the Experian/Fair Isaac Risk Model and TransUnion has the EMPIRICA score. The three versions can come up with varying scores because they use different mathematic formulas and may have different information.

While FICO will not disclose how they actually compute the credit score the FICO score itself is known to be calculated by using a combination of data that appears on your credit report.

  • 35 percent – An individual’s history of making credit payments on time
  • 30 percent – The total debt to available credit ratio
  • 15 percent – The length of time credit lines have been open
  • 10 percent – The frequency with which someone applies for new credit
  • 10 percent – Other factors such as the types of credit lines

Other factors used to formulate the final score are:

  • Time at present job
  • Time at present address
  • Are you a homeowner?
  • Number of recent inquiries
  • Number of credit lines on your report
  • Number of years you have had a credit in the credit bureau database

Recently FICO updated the way they analyze and score credit reports to better serve consumers and the credit industry. The redeveloped FICO 08 score offers more refined risk prediction compared with prior versions. As a result, the formula provides significantly improved risk evaluation across the entire population of consumers, more than twice the improvement offered by prior updates. The new formula improves the predictive power for credit shoppers and those with prior blemished credit histories, as well as adjustments to better address consumers who have limited credit experience.

Some consumers may see their credit scores go up slightly but most will remain unchanged. The new formula also provides greater flexibility regarding the negative effect of missed payments on a credit report. For borrowers who are in behind on an account, their scores may drop less if they have a number of other credit accounts in good standing. But their scores could drop farther if the consumers’ credit reports show multiple delinquent accounts. The formula also allows for consideration of one major delinquency on an otherwise clean report. However, multiple delinquencies will cause the score to drop.

The new system not only shows the how likely they are able to pay back debts, but it gives some insight as to how well they also manage debt in general. Additionally the FICO score calculates the ability to manage multiple types of debt. For instance, FICO will reward people who have both revolving debt (credit card) and installment loans (auto and home loans). A person who can effectively manage many types of loans is considered more credit worthy.

According to the current scoring model, to get the highest score, you need to:

  • be at your job for over 5 years
  • be in a professional occupation
  • have lived in the same home (that you own) for over 10 years
  • have had credit and loans for many years
  • have almost no debt
  • have applied for any new loans for the last two years

Ultimately, to keep your credit score up and show financial worthiness you must be a good steward of your finances. If you do not have a higher score, there are many ways to help raise it. FICO recommends that you pay your bills on time, keep your credit card balances low and take on new credit only when you really need it. They also offer a slide show about credit scoring on their website that is very helpful to information seekers . Now that you know some of the ways credit scores are calculated, you can take advantage of various tips that will allow you to increase your credit score.

Editor’s Note: Check out this post to learn about FICO changes planned for 2015.

The editorial content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone. Additionally, the opinions of the commenters are not necessarily the opinions of this site

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