What Is a Credit Score Simulator?

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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Agencies That Allow You View Your Credit Reports for Free

Consumers in the United States are entitled, through the Fair Credit Reporting Act, to receive a free annual credit report. Equifax, Experian and TransUnion are the only credit reporting agencies in the United States. They have authorized annualcreditreport.com as the only official source for free consumer credit reports. This official credit report includes reports from each of the three U.S. credit reporting agencies. The official annual credit report may be obtained online, by phone or through the mail. You are also entitled to a free credit report within 60 days of being denied credit. A number of states also allow consumers more than one free annual credit report.

Be Safe

There are many websites offering credit information and free credit reports. While many of these sites are legitimate, credit reports are a common target for criminals and websites that attempt to gain access to your confidential financial information. Because of the security risks to consumers, the U.S. government and the credit reporting agencies recommend that consumers do not click on links from third-party websites, but instead go directly to the only authorized free credit report site: www.annualcreditreport.com.

What's in My Credit Report?

Your free annual credit report is an overview of your personal credit history. It includes your current and previous residences, employers, credit cards, loan accounts, credit and loan delinquencies and any accounts that have been reported and turned over to a collection agency. It also includes a list of companies and organizations that have requested your credit report and those that have been given access to your information. It does not include personal financial information such as bank balances, income or monthly bills such as utilities.

Errors and Differences

When reviewing your free annual credit reports, you may discover that some of the information in your credit report is wrong. You may also notice that the information in each of the three credit reports may be different. It is vital that you review and report any errors on your credit reports as these errors may interfere with your credit score and could possibly result in being denied credit or a loan. Each of the credit reporting agencies provides information on how to report errors.

Where's My Credit Score?

Your free annual credit report does not contain your FICO score, also known as your credit score. This score is developed for the three credit reporting agencies by the publicly traded Fair Isaac Corp. You may have a different credit score at each of the three credit reporting agencies due to differences in your credit reports. If you obtain your free annual credit report online, you will be given the opportunity to purchase your FICO score from each of the reporting agencies. The fee for each credit score is usually under $10. You may also obtain your FICO score for a fee from MyFICO. Because your FICO scores are used to determine whether or not you are a good credit risk, they are important numbers to know.

Credit Monitoring

Checking your credit report each year is a good way to guard against identity theft. In reviewing your credit reports, you will be able to see if anyone else is applying for or taking out loans or credit in your name. There are many credit monitoring services that, for a fee, will monitor your credit reports each month for unusual activity and potential identity theft. Your bank or credit union, MyFICO and the three credit reporting agencies all offer secure, low-cost, monthly credit monitoring and identity theft prevention services.

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What Are High & Low Credit Scores?

Wading through information on credit scores can be confusing, because there are few absolutes in the sector of credit scoring. One lender may view your score as high, while another could consider it too low -- and both could be right. Instead of zoning in on a score to reach, look at what your credit history contains.

Considerations

Your FICO credit scores exist to tell lenders what a mathematical formula designed to rate the odds of you missing a payment says about you, not whether you are a good credit risk. So, one lender may view your 700 as an exceptional score and give you the best rate possible, while another could adjust your rate higher, because you do not fall into the highest class of credit scores.

Identification

Over time, lenders have settled on a fairly narrow range of scores that they consider the breaking point between a good and bad risk. Most creditors consider anything above 620 a prime or good risk, according to Bankrate. Above 700 means you are a very low risk borrower, and anything above 760 slots you as lowest risk, based on the FICO scoring model. An 850 is the highest score in the FICO system but next to impossible to reach. A score above 800 is elite and extremely difficult to obtain. Once you get below 620, almost anything is equally bad. Only 13 percent of U.S. consumers have a score below 600 and a borrower in this class tends to miss payments more than he pays on time.

Credit Report vs. Credit Score

Credit scores and credit reports are not the same thing. A credit score uses information in your credit report to quantify you as a risk. Thus, you should examine your report for negative information to find out why you have a low score. A single negative item usually has a much larger impact than a single positive item. If you have a low FICO score, there are probably several missed payments and maybe some delinquent accounts, such as a collection account, charge-off or even a bankruptcy.

Tip

The only way to gauge whether you have a high or low credit score is to see what a lender thinks of your credit. You can apply for mortgages, student and auto loans as many times as you want in a 45-day window and have it count as only a single inquiry. Ideally, you should become current on any past due accounts and eliminate as much debt as possible from your profile before submitting an application.

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Why Is It Important to Have a Good Credit Score?

Your credit score is only one part of your overall credit picture, but it plays an important role in your personal finances. Keeping your credit score in good shape can help you keep your finances on track.

Definition

Your FICO credit score is a number between 300 and 850. It is determined through a statistical analysis of five factors regarding your payment history and credit use.

Getting Good Credit Terms

Companies use your credit score as a predictor of your ability to pay back a loan in a timely manner. For this reason, consumers with higher scores will be offered better terms such as lower interest rates, fewer fees or flexible repayment periods.

Getting Credit

By establishing a good credit score, you ensure that you can get a loan or a line of credit. You won't have to worry about shopping around trying to get a bank to accept your application.

Employment

Many employers are beginning to use credit scores and records to help them assess the overall suitability of a candidate. This is a more common for individuals who would handle money regularly or have access to company credit accounts.

Housing

While your credit score plays a large part in determining eligibility and terms for a mortgage, many people don't realize that it can also affect your ability to find a residence to rent. If you have a bad credit score, many rental agents or complexes will require that you obtain a co-signer.

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How Fast Can You Increase Your FICO Score?

The FICO credit score, developed by the Fair Isaac Corporation, is one of the most common measurements lenders use to assess your creditworthiness. Much of the score is based on your history of using credit, meaning increasing your score is not something you can do overnight. However, there are some things you can do that will bring your score up within a matter of weeks.

How Your Score is Calculated

Fair Isaac uses five factors in calculating your FICO score and gives different weights to each. Credit history is the most important factor, making up 35 percent of your score. The amount of debt you have is the second-most important factor, at 30 percent of your score. Credit history makes up 15 percent of your score, while the types of credit you have and how often you take out new lines of credit make up 10 percent each.

Correcting Errors

One of the fastest ways to raise your FICO score is to correct any errors on your credit report. Bankrate.com cites a 2004 study showing that up to 80 percent of credit reports contain some sort of error. While most are minor, some, such as showing accounts that are current as past due, can harm your score. When you dispute these errors to the credit bureaus, they have 30 days to act. You can try to speed up the process by contacting the bureaus by phone, but the most reliable way is to dispute the error in writing and provide copies of any corroborating documentation. Once the error is fixed, your FICO score should increase quickly.

Paying Off Debt

Because a big portion of your FICO score is based on how much you owe, you can improve your score relatively quickly by paying down debt. Liz Weston, writing for MSN Money, says that you can improve your credit score in 30 days or less by paying off a significant amount of credit card debt.

Considerations

Most actions you can take to increase your credit score take time. As stated on the MyFICO website, "Repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score." The best thing you can do to raise your credit score and keep it high is to pay your bills on time. If you have black marks on your credit report, such as a bankruptcy, foreclosure or debt sent to collections, it will take years before the items disappear. However, their effects on your credit score will dwindle over time if you use credit responsibly.

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How Do You Determine What a Credit Rating Score of Excellent or Good Means?

When it comes to the world of credit scores, consumers can get bogged down in confusing terminology. You may learn what your three-digit credit rating score is, but not have an understanding of whether it's considered excellent, good or bad. Or, consumers may be told that they have "excellent" credit, but wonder what that credit score range includes and what the positive effects of excellent credit may be. Understanding key definitions related to credit rating scores can help you determine whether you'll qualify for the perks and privileges associated with "good" or "excellent" credit.

Credit Rating Scores

Companies use a variety of factors to determine your credit rating score. Elements taken into consideration include the type of credit you hold -- for example, installment loans such as student loans, auto loans or home mortgages are viewed more positively than credit cards -- and overall debt loan compared with annual income. Your score is affected by your credit history; on-time payments of more than the minimum required help boost your score, and late or skipped payments will hurt your score. Having a long history with creditors increases your score; opening numerous accounts over a short time indicates you may be scrambling for credit because of poor financial management. Having accounts turned over to collection agencies or filing for bankruptcy can cause your credit rating score to take a big hit.

Excellent

Consumers with credit rating scores of 720 or higher are considered to have excellent credit, according to Lending Tree. Excellent credit rating scores mean that you'll qualify for preferred interest rates, and may be permitted to take out larger loan amounts for home mortgages with less money down, compared with consumers with average or below-average credit. While many consumers pay interest rates exceeding 18 percent in 2011, excellent credit scores may net you interest rates of 10 percent or lower. Once your score skyrockets into numbers over 770, creditors may pay less attention to whether your score is a 775 or 780; you've already established yourself as a trustworthy consumer, according to Credit Scoring.com. The average credit score is around 720, according to the same source.

Good

Good credit scores reflect ratings below 720, but at least 675. Consumers with good credit scores may not qualify for the most preferred loan rates or credit card offers, but should still score decent interest rates and loan offers compared with people with bad credit. Good scores may positively impact your auto loan approval, or increase the chances of landing an apartment lease or job offer. Scores below 620 may result in lenders taking a closer look at your finances before approving applications.

Improving

If you'd like to transition your credit score from good to excellent, first pull your own credit history to identify whether any incorrect information could be dragging your score in the wrong direction. After contacting the three major credit bureaus -- Experian, Equifax and TransUnion -- to correct any errors, continue making on-time payments of more than the minimum until debts are paid off. Avoid taking out new, unnecessary lines of credit, according to the Consumer Federation of America.

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How Does "Settled for Less" Affect Your Credit?

Settling an account may give you temporary relief from a debt problem, but you could have a longer, more serious problem: bad credit. However, it usually is not the notation of a settled account that affects your credit but the events leading up to it. You need to take action early to prevent an account from turning toxic to your credit score.

Identification

In pure numbers, settling an account takes 45 to 65 points off of a FICO credit score of 680, according to Ellen Cannon of Bankrate. Negative items harm credit scores more as a person's score rises. For example, for a person with a credit score of 780, a settled account on their credit history damages their FICO rating 105 to 125 points.

Considerations

The reporting of a settled account usually does far less damage than 45 points. Creditors rarely settle an account until you have missed several payments. A payment late by three months takes 70 to 135 points off of a FICO score and is almost as bad as a bankruptcy--not counting other accounts on which you may have defaulted. Thus, by the time the creditor settles your account, your credit score already likely is trashed.

Credit Reporting Time Limit

Any missed payments and settled accounts stay on your credit report for seven years and 180 days after the date of initial delinquency. The date of initial delinquency is the first time you miss a payment leading up to the charge off. This is different from the date of last activity. The date of last activity can change, such as when a creditor sells an account to a collection agency, without affecting the federal credit reporting time limit.

Tip

Find a credit counselor, preferably from a non-profit organization such as the National Foundation for Credit Counseling, to help you weigh your options on the defaulted account. Settling an account, for instance, may be better for your credit than filing for bankruptcy but not as ideal for your credit score as paying it in full. The creditor, for instance, may delay payments on the account and make other concessions that let the creditor report as current, if you repay the entire debt.

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