Personal Credit Coach

How Credit Scores are Calculated

Stephen Leifer - Thursday, July 21, 2016

Though consumers will likely never know the exact formula used by Vantage or Fair Isaac to calculate credit scores, there is more information available than ever before, making it easier to prevent future credit damage for the consumer.  Both scoring systems have made some information public concerning the calculation of scores, so you can better understand how that magic number is calculated.


Just paying your bills is not enough to have a solid score.  There are actually several other factors used to calculate you score. 


Credit  utilization is one factor that confuses consumers.  People assume if they have never used credit their score will be high.  In order to build a strong credit profile, you must utilize the credit offered responsibly (and a bit craftily).


For instance, a person offered a credit card with a $20,000 limit who uses just $2000 of that limit is considered a better risk than someone offered a $5000 card who uses just $1000.  Despite having $1000 in additional debt, the first person’s utilization ratio is  only 10% versus the second person who might have less debt but a usage ratio of 20%. 


This is also a reminder how important it is to not close revolving credit accounts .  Instead, try to keep the gap between credit to which you have access to (availability) and usage of that credit,  as wide as possible.  Five cards with access to $100,000 with a balance of $1000 is better than $20,000 of available credit with a balance of $1000.  You owe the same amount, but you have access to far more credit if needed, boosting your score.


In addition to available credit and utilization, scoring systems also look at length of credit history and the type of credit a consumer has used.  The goal of credit scoring is to help a lender assess their risk of lending to a borrower. With the help of the scoring models used today, lenders have been able to make better and fairer decisions.

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