Credit Score Formula

Credit score formula – you may not know

FICO (Fair Isaac Corporation) score is the most widely used scoring tools, with the help of which, your credit score is calculated. Though the credit score formula that FICO use is top secret, yet the company provides an overview of what it uses to calculate your score.

Credit score formula – its components

There are 5 key components of FICO credit score formula, which are discussed below.

1. Your payment history (35%) – It determines your ability to pay back your debts on time.

2. Amounts you owe (30%) – This part of your credit report examines your ability to repay your debts.

3. Length of your credit history (15%) – It is based on the oldest account in your credit file.

4. New credit (10%) – This portion is affected by any new hard inquiries made by your creditors.

5. Types of new credit (10%) – It is based on the types of credit accounts that you have.

Credit score formula – how it works

The scale of FICO credit score runs from 300 to 850. Your score is calculated on the basis of credit score formula and a number is assigned in between 300-850. The better your score, your chance of getting better interest rates on your loans increases. If your score is 720 or more, then you will get favorable terms and conditions on your loans.

Credit score formula – reconfigured by FICO

FICO has introduced some new changes in the year 2009. FICO now uses a new credit score formula in order to describe the credit problems in a better way. This new scoring technique is able to predict defaults about (5-15) % better than that of the older model.

FICO score is not the ultimate thing that your lenders consider while offering loans. Your chance of getting better rates on your loans increases if you have a good paying job.