Understanding Your Credit Score

How Are Credit Scores Calculated

How Are Credit Scores Calculated

Each type of credit score uses algorithms to calculate the potential risk by adding value to items such as payment history and number of credit inquiries. For FICO scores, there are 5 factors used to calculate credit scores. Each factor has different weight in how much they affect your credit score.

  1. 35% – Payment History
    The greatest impact on your credit score is paying off debts on time. If you have late payments, delinquencies, or charges, your score will be impacted negatively. However, having a few late payments doesn’t mean that you will automatically have a low score since this is just one piece of the information used to calculate the credit scores.
  2. 30% – Amount Owed
    The ratio between the amount owed and the remaining available credit has a high impact as well. Owing money on credit accounts doesn’t necessarily have a negative impact on the score, but having high balances can indicate that the person is overexerted and more likely to miss payments.
  3. 15% – Credit History
    The length of time credit lines have been opened increases your score. Note that it is also taken into consideration how long it has been since you used certain accounts.
  1. 10% – Type of Credit
    Types of credit, such as credit cards, retail accounts, installment loans, and mortgage loans will be taken into consideration. Having good debt, such as credit cards and installment loans, will bring up your scores.
  1. 10% – Inquiries and New Credit
    The number of inquiries and new credit accounts are taken into consideration since people that opened several credit accounts in a short period of time are a greater risk of not paying back their loans.

Knowing your FICO score and credit worthiness is important, especially if you are looking to get a new loan. You can use websites that provide free credit scores, but often these websites provide you with an estimate rather than your actual score. The Consumer Financial Protection Bureau (CFPB) published a report on the differences between credit scores available to consumers and those to lenders, so make sure you do your research before you submit an application for a loan. Should you have any questions about credit scores, whether you qualify for a mortgage loan with your current credit score, or how to apply for a loan, click here to contact one of our licensed mortgage loan originators today!


Here is what you should know

When I talk with people about travel hacking, and the strategy of churning credit cards for points, many have questions about how to maintain a strong credit score. The answer is simple. If you understand how your score is calculated and monitor your credit report, your financial health can significantly improve while you hack your way to travel freedom.

Knowledge is power. You can get a free copy of your credit report by visiting You can also track changes to your report and see a good (but not exact) estimate of your FICO score by signing up for Credit Karma is one of the best available free tools for travel hackers seeking to track and manage the impact of credit card applications.

Here is what you should know about credit scores.

The most common credit score formula is called the FICO score. Your FICO score is calculated entirely based on the information contained in your credit report. Lenders use your credit report, credit score, and other factors like income and job history to decide whether to approve your credit card application.

You can get comprehensive information about FICO by visiting The following is a summary if the information relevant to maintaining strong credit while churning credit cards for points.

The credit report data is grouped into five categories. Some have more weight or impact on your credit score than others. The exact formula for the FICO score is a secret, but the percentages below can be used as a general rule.

Limitations of your credit Score

Once again it cannot be emphasised enough that the credit score shown on your credit report even if it is at the higher end of the scale,  does not represent some kind of passport to credit or a guarantee that you can quote lenders as proof of entitlement. As explained, it is merely a guideline towards whether you are likely to represent a high or low credit risk and different lenders will deploy their own credit score, which is specifically adjusted for the particular financial product on offer. The details of that credit scoring system are likely to be confidential.

Credit is a more complex transaction than what you see between a consumer and a standard high street store where paying a set amount guarantees delivery of the goods. Credit is not something which has a right attached to it. It is a lending decision from an institution based on a balance of risk and potential profit.

Having access to your credit report and credit score however does give you the opportunity to make informed decisions about your current borrowing arrangements and the impact they might have on future credit applications as well as furthering your knowledge of how to improve your credit score.  It also enables you to develop an idea of where you stand in relation to credit without having to submit real life applications, which, if turned down, can have a detrimental effect on your future credit applications.


What is My Credit Score

A credit score is a points-value awarded to you by a lender, based on an examination of your credit file and credit history. The higher your credit score the more likely you are to be able to obtain credit from banks and other lenders. Your credit report is supplied by one of the three credit reference agencies in the UK which are Callcredit, Experian and Equifax. Nowadays, many companies and organisations like MyCreditMonitor work alongside them to offer a service that enables consumers to check their credit score regularly.

In essence, your credit score is made up of points that you are awarded for positive borrowing habits such as always paying your credit card on time or subtracted for demonstrating a track record that is more likely to make lenders wary about letting you borrow money such as defaulting on past payments or making a lot of previously unsuccessful applications for credit.

Why are Credit Scores used?

The purpose behind a credit score is to add some credible evidence to substantiate the process by which organisations make lending decisions about their customers. Organisations like banks and credit card companies need to have a clear system in place for deciding who to lend money to and at what rate. In today’s modern, complex and dynamic financial environment it does not make sense to rely on hunches or just what the borrower tells the lender, as that is likely to lead to unnecessary risk on the part of the lender and ultimately poor lending decisions.

Having some kind of formula in place for weighing up financial risk based on previous credit behaviour is a much fairer and more effective way of making sound decisions. Having said that, there is no such thing as a universal credit score as different lenders apply their own criteria in different ways and for different financial products. For example, a bank might be willing to issue you with a credit card but might turn you down for a mortgage or other loan application.

Understanding how to check my credit score

If you wish to check your credit status by accessing your credit report from one of the main credit reference agencies, there are likely to be options to check your credit score and potentially access a free credit score and information related to how to improve your credit score. There are a number of key things to bear in mind.  The two details you are really looking for are the credit score or credit rating itself followed by the details of the specific bits of information that have been used to calculate it.

Firstly when it comes to the credit score itself, different agencies use a different scale for their scores for example some go up to 700 while others go up to 1000. The basic principle however remains the same i.e. the higher your credit score, the more creditworthy you are deemed to be and the easier you should find it to obtain credit. Some credit reports may also give you a credit rating between 1 and 5 as an additional means of ranking creditworthiness.

Understanding your Credit Scores

Bad Credit: Credit Scores Between

600 and 650

Having bad credit is not a pleasant experience. You’ve had multiple credit issues in the past, most likely involving payment history on one or more accounts. You’ve also most likely had an account or two in collections, and could have possibly had a bankruptcy filing.

It’s going to be extremely difficult to find any lenders willing to lend to you without a significant down payment or collateral to secure the loan against default. Insurance agencies will still underwrite insurance policies for you, but the products will be limited and they are going to cost significantly more than the same products for customers with better scores. You may also have higher car insurance costs.

Some employers – particularly those in financial, defense, chemical, and pharmaceutical industries – will not hire you if you haven’t built or maintained solid credit. They may believe you pose an above-average risk of employee theft or fraud, which could even make it difficult to change positions or get a promotion with your current employer.

Having bad credit means it’s time to roll up your sleeves and get real about your current financial situation. Though your current position may be of no fault of your own – thanks to a job loss, illness, or other unforeseen circumstance – it’s your responsibility to take the necessary steps to reverse the course you are on. Take a good hard look at where you are in your life and take the necessary steps to reverse the trends that led to your bad score.

Credit Scores Below 600

If you have very bad credit, you are more than likely delinquent on more than one account. You have active collections accounts, and probably have at least one judgment, repossession, or bankruptcy in your file. If you have credit cards, they are maxed out or shut off for nonpayment.

This is as bad as it gets, as this will have many negative effects on your life. Lenders, with the exception of those who specialize in lending to borrowers with bad credit, will not approve you for any loan product, even if you can provide a sizable down payment or collateral, and insurance agencies will likely refuse you based on the risks you pose. Often, employers that check your credit will not hire you, whether there is another viable candidate or not.

Bad credit, no matter how bad it is, is still a temporary condition. Late payments will vanish from your records after 7 years, and public records are purged after 10.

Mark Callen

Excellent Credit: Credit Score Above 800

If your credit score is above 800, you have an exceptionally long credit history that is unmarred by things such as late payments, collections accounts, liens, judgments, or bankruptcies. Not only do you have multiple established lines of credit, but you have or have had experience with several different types of credit, including installment loans and revolving lines of credit. You generally have a stable work history, usually with one company.

Simply stated, you are an A+ borrower in the eyes of all lenders big and small, and will have no trouble securing a loan of your choosing. Be prepared to receive the very best interest rates, repayment terms, and lowest fees available. Insurance companies love people like you because they’re confident that you’ll pay your premiums on time and pose virtually no risk of insurance fraud. Plus, prospective employers love you because you have proven that personal and financial responsibility are of the utmost importance to you.

Very Good Credit: Credit Scores Between 750 and 800

If your credit score is between 750 and 800, you have a long and distinguished credit history that shows a responsible payment history and the ability to handle multiple types of credit responsibly. As a matter of fact, for the most part, you are regarded in the same standard as borrowers with excellent credit history, with the exception that you may have a higher debt-to-income ratio.

In the eyes of lenders, insurance companies, and employers, you’re just as good as anyone with excellent credit and, for the most part, will receive the same red carpet treatment. Ultimately, having very good credit will qualify you for some of the best deals in town.

Good Credit: Credit Scores Between 700 and 750

Having good credit means that you have built a solid credit history by working hard to keep your accounts in good standing – however, there may be a late payment or two somewhere in your past. Things happen sometimes, but they are nothing you can’t handle. You might have had a collections account reported, but you’ve paid it. And you know you have some extra credit card debt, but you’ve made strides to get it under control.

Generally, lenders will have no issues loaning money to someone like you. Your good credit score will land you competitive interest rates and low origination fees, though certainly not as good as you could have gotten with a few more points on your score. You’ll also have no trouble getting an insurance policy for just about any need, but you should expect your premiums to be somewhat higher than for those with excellent or even very good credit.

Furthermore, your good credit should not have any negative effect on your ability to get hired.

Fair Credit: Credit Scores Between 650 and 700

Having fair credit means that you’ve hit a few speed bumps in the past. Late payments, collections accounts, and maybe even an aged public record dot your credit history. Or, perhaps you simply have too much debt.

Regardless of the reason for the less-than-stellar score, you’ll have a harder time finding a lender willing to service a loan, especially if the low credit score is a result of slow payments. You’ll represent a higher risk of default to a lender and may therefore be required to secure the loan with a down payment or with tangible personal property (otherwise known as “collateral”) before a loan offer will be extended.

Furthermore, unsecured revolving credit will be very difficult to come by. Insurance companies will tend to price insurance policies up for people in your credit category due to the potential for nonpayment of premiums or the higher-than-average risk for committing insurance fraud. Also, some jobs may not be available to applicants with fair credit, such as jobs in the financial sector.

Having fair credit means that you have some work to do in order to get yourself back into good financial shape. It is imperative to take steps now to prevent any additional damage to your credit report, and get back on the road to good financial health. By reducing credit card debt, ensuring that you get your bills paid on time every month, and paying off any open collections, your credit score will move enough during the next three to six months to get you back into the realm of a good credit rating.

Alice Moore