How to Calculate Credit Rating

Your credit rating or credit score is a number that summarizes the credit risk you present to a lender based on your credit history. The FICO credit rating ranges from 300 to a perfect score of 850 and is the standard used by major credit bureaus and most lenders. Unfortunately, it's not possible to calculate credit rating precisely because the firm that created the system, Fair, Isaac & Co., keeps the algorithm secret. But the main components and factors making up the credit-rating system are public knowledge. By using them, you can learn to manage your use of credit so you build a top-notch credit rating, even if you can't calculate it exactly.

Instructions

1

Order the free copies of your credit history that you are entitled to each year. The Federal Trade Commission authorizes only one provider for these free reports. You can order online by linking through the FTC website or by calling (877) 322-8228. Use your credit history as a guide to evaluate your credit standing and to alert you to any errors that need correction.

2

Evaluate your payment history (this counts for 35 percent of a FICO score). Ideally, every bill should be paid on time. An occasional slow payment of just a few days has little or no impact because most lenders don't bother to report a good customer for a rare lapse. What will hurt a credit rating is even one payment that is more than 30 days late. This can take up to 100 points off your credit score.

3

Total your debt obligations. Your debt, compared with your income, is the second-most important part of a credit rating (30 percent of FICO). What's most important is the size of your payments. A mortgage has a relatively small payment for the size of the debt, so the amount is weighted much less heavily than credit cards or other borrowing that requires you to pay a bigger part of the debt each month.

4

Look at the type of debt you have (10 percent of FICO). Secured debt is any mortgage, car loan or any debt for which you put something of value up as collateral. If this is mostly the type of debt you have, that's a point in your favor. If your obligations are mostly unsecured debt such as credit cards, that's a minus.

5

Take time factors into account. Add up how many applications you've made and accounts you've closed in the past year. One or two are normal, but if you constantly open or close credit accounts, it lowers your credit rating (10 percent of the FICO score). The other time factor is just that: time. The longer you use credit wisely, the better, and this makes up the final 15 percent of the FICO score.

6

Consider other factors that might lower your credit rating. A bankruptcy or foreclosure has a strong negative effect on a credit score. In some ways, some other problems are even worse. A tax lien will stay on your record for 10 years or more, and a default on a student loan is there for life. Defaults on other debts or court judgments against you brought to collect a debt also hurt.