A credit score is calculated by using a complex mathematical formula and analysis system. Credit scores are computed by some financial institutions and lenders, but mostly by private companies called credit bureaus, or credit agencies. These agencies collect and record information about how you've handled credit in the past, things like how many credit cards you have, how much money you owe and whether you make timely payments. This information is fed into a mathematical formula that assigns different levels of importance to each piece of data to determine your credit score.
The FICO Formula
The formula used by most companies to compute credit scores is called the FICO formula. FICO refers to the Fair Isaac Corporation, the company that developed the scoring system back in 1956. Any credit score computed using the FICO system is called a FICO score. The FICO formula evaluates data from five major categories to determine your credit score.
The Categories
Each category evaluated by the FICO formula makes up a percentage of your total FICO score. The formula evaluates many factors in each category to determine whether you are a good credit risk. Below is a list of the five categories along with the percentage that each contributes to your overall score:
Payment history---35 percent
How much total debt you have---30 percent
Length of credit history---15 percent
New credit---10 percent
Types of credit you are using---10 percent
The FICO formula does not consider your age, race, gender, marital status, salary or occupation when computing your credit score. However, individual lenders may consider these factors.
What the Numbers Mean
Credit scores computed using the FICO system range from 300 to 850, the higher the score the better. According to MyFICO.com, a division of Fair Isaac, most people have a score in the 600s or 700s. The average FICO score for people in the United States is 723. Credit scores above 750 are considered excellent by most lenders, around 700 is good and close to 650 is fair. A score below 600 is considered poor.
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