credit score formula
FICO Credit Scoring is a method developed by Fair Isaac & Co. to assess your ‘credit worthiness’.
Actually, three FICO scores are calculated to find my FICO score. They are found using data provided by each of the three bureaus: Experian, Trans Union, and Equifax. Some lenders use one of these three scores, while others may use the middle score.
While the best known score in the United States is FICO (which is the most widely used in the mortgage industry), there are many others, such as the NextGen and Vantage Score.
A credit score tries to judge how likely a potential borrower is to default on a loan or other credit commitment over a specified period of time. Credit scores are based on information from a person’s credit report. Lenders use credit scores to assess the potential risk of lending money to consumers in an attempt to limit risk-related business losses.
Some of these uses include determining who qualifies for a loan, assigning an interest rate, assigning credit limits, and managing accounts that are already open (for example, processing delinquent accounts).
FICO scores are designed to indicate the probability that a borrower will default within the next 24 months. There is no publicly available information to determine what the scores mean in terms of statistics. A separate score, BNI, is used to indicate the probability of bankruptcy.
If your FICO Credit Score is marginally low, or definitely low, you should consider credit repair before applying for any new credit, whether it’s a Home Equity Line of Credit, Auto Purchase or Student Loan. Self-motivated credit card debt consolidation is probably the most effective repair. Other credit consolidation may be required in addition to the credit card consolidation, but if your FICO Credit Score is lower than desired, credit cards are the most likely point to strike first.
The three major credit reporting agencies (also often but incorrectly called credit bureaus) in the United States (Equifax, Experian, and TransUnion) calculate their own credit scores. These versions, while all developed for agencies by Fair Isaac, differ and are regularly updated to reflect current consumer payment behavior. NextGen scores are the most recent scores, but creditors vary on which version they prefer to use.
Each of the credit reporting agencies has developed its own version of the credit score intended to compete with the Fair Isaac score. Although not as widely used, these scores (for example, Trans Union’s “TransRisk” score or Experian’s “ScoreX” score) are less expensive than the FICO score. Consumers and lenders often derisively refer to these scores as “FAKO” scores, since they do not use official Fair Isaac methodologies.
Fair Isaac offers scoring models for the US, Canada, and South Africa. It also offers a “FICO Global” for many other countries.
Although the exact formula for calculating credit scores is a closely guarded secret, Fair Isaac has revealed the following components and the approximate weighted contribution of each:
35% past payment timeliness (only includes payments after 30 days past due) 30% capacity utilization: the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits ) 15% length of credit history 10% types of credit used (installments, revolving, consumer financing) 10% recent search for credit and/or amount of credit recently obtained