Good Credit Score

Credit Score Calculated From Credit Reports Explained

Part 2: Credit Score Calculations Explained

Part 1: How Your Credit Score Is Calculated

New Credit - 10%

Part of your score is based upon what is called new credit. When you open a new Citibank rewards card or a Capital One rewards credit card, that lowers this part of your credit score.

Ironically, this section is the one that people worry about most when it is a very tiny percentage of the overall score. 

This is where people get the mistaken impression that "pulling their credit" will hurt their score.  It is important to understand that the people at FICO are not dumb and they understand how the world works.  It is not their mission to give you a lower score.  That doesn't help their clients, the banks, get and keep the best customers which are those with the highest credit scores.

Pulling your credit is not a one size fits all kind of thing. 

When someone pulls your credit for a job application, or for an apartment lease, or for qualifying for insurance, these are known as soft pulls.  These informational only looks at your credit score do not count against you in anyway, NO MATTER HOW MANY TIMES your credit gets checked in this way.

Also in this category are credit pulls that happen from companies that you already have accounts with.  These do not count against you either (mostly because they usually happen without your knowledge.)

When you are shopping around for a loan, people are going to want to pull your credit in order to quote you a rate. If ten different banks pull your credit over a three week period in order to quote you mortgage rates or home equity loan rates this will not hurt your credit score more than a tiny fraction and it will go back up quickly.

What does hurt your credit score is opening a bunch of new accounts. 

Let's say that either you are getting into trouble, or you are planning to do something that will cost you a lot more money than you are used to handling. That is a risk and therefore your credit score should be lower.

So if you plan to start a new business and you are going to open twenty new credit cards "just in case," your credit score will be lowered.

Types of Credit Used - 10%

Here is where what kind of credit you have comes into play. 

For example, a person with $100,000 in debt that is all on credit cards is a much bigger risk than someone who has $100,000 in debt on a first mortgage.

  In general, mortgage debt is considered better than student loan debt, which is considered better than car loans, which are considered better than credit cards, which are considered better than personal loans. 

So $50,000 in student loan debt might yield the same credit score as $10,000 in credit card debt does.

How To Raise Your Credit Score

There are dozens of services out there that claim they can increase your credit score.  They can't. 

What these services do is dispute everything negative on your credit report. In theory since the item is under dispute it can't be counted in your credit score.

That isn't really true.

A credit score is calculated FROM a credit report. How it is done is a closely held secret, but there is one thing everyone does know. A lender that gets a credit score for you will also be notified of all the disputes on your credit. This is a big fat red flag and even if your score did increase temporarily (it probably won't) it won't matter because no one will give you a loan with a bunch of disputes listed on your report.

The best thing you can do is watch your credit score on a regular basis and when it goes up or down, make adjustments. If you just got a new credit card and your score went up, keep it. If it went down, pay it off and close the account.

See How to Raise Your Credit Score Like a Pro for details.

Now What?

People worry too much about their credit scores.  Pay your bills on time every time time is the best advice you can get and the only way to a long-term high credit score. 

You might want to read Your Credit Report if you haven't already for information on where all the information to calculate your score comes from.

Part 2: details about credit score calculations

Part 1:How Your Credit Score Is Calculated


Even More Information About Credit Reports and Credit Scores