Credit scores are calculated using a formula developed by the Fair Isaac Corporation and are used by lenders to determine how creditworthy lenders are. These scores range from 350 to 850, with higher scores being better. Your scores are calculated using information found on your credit report.
What is a Credit Score Simulator?
The Fair Isaac Corporation, creator of FICO scores, does not release the formulas for calculating credit scores to the public so people cannot calculate their credit score on their own. However, a number of groups have attempted to create similar formulas to allow consumers to estimate what their FICO scores may be. These calculators are called credit score simulators, and they attempt to predict what your credit score will be based on information you provide.
Factors that Affect Credit Scores from Simulators
The Fair Isaac Corporation does not release the actual formula but does explain the factors that are used in the calculation of the score. These factors are your payment history, which makes up 35 percent of your score; your balances owed, which makes up 30 percent of your score; the duration of your credit history, which is 15 percent of your score; your use of different types of credit, which makes up 10 percent; and your recent applications for credit, which makes up 10 percent of your score.
Why the Formula is Kept Secret
The formula for calculating credit scores is kept secret for business and reliability reasons. The Fair Isaac Corporation has an effective monopoly on the credit score industry because it has developed a model that lenders rely on for its accuracy. If the formula were released, Fair Isaac would lose a significant amount of revenue. Also, the Fair Isaac Corporation argues that if the formula were released, the formula would lose its effectiveness because consumers could manipulate their finances to artificially inflate their scores.
Benefits of Credit Simulators
One of the biggest benefits of using credit simulators is you can estimate what would happen to your score if you changed certain elements of your credit report. For example, if you were considering opening a new credit card account, you could estimate the effect that would have on your score. You could also estimate how much your credit score would be affected by making all of your payments on time for the next year.
Limitations of Credit Simulators
Credit simulators can only use the information you provide to calculate your score. While most people will fill out the information to the best of their ability, they may not have a complete view of their credit. For example, they may not realize that each time they apply for a new credit card an inquiry is created on their account or they may have incorrect information on their credit report that will negatively impact their actual score. Also, most credit scores will give you a range of scores rather than a precise score. While this may not be important if your range is 800 to 850, the difference between a 680 score and 730 score can be significant.
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