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How Your Credit Score is Calculated
Four Minute Read
Written by Ed Andrews III on July 26th, 2020
If you've ever checked your credit score online or through an app, only to have a lender tell you your actual credit score was something entirely different; you’re not alone. Keep reading and I’m going to tell you exactly how your credit score is calculated, and why it’s different depending on where you look.

First things first….there are three credit bureaus (Experian, Equifax, and Trans Union), get your credit score directly from one of them. Do not use these third party websites that offer access to your credit report. The scores they give you will often be inaccurate. 

The reason for this is simple. There a multitude of different scoring models for calculating credit scores, and often the one displayed on third party credit websites is not the score used by lenders.

Understand that each bureau has multiple scoring models for calculating credit scores. You may not realize this but at any given time Experian doesn’t have one credit score for you, they have seven different scores for you. It’s the same with the other three bureaus. 

Different lenders use different models, as different models may weigh certain types of accounts heavier than others. It’s not uncommon for their to be a 50+ point variance between your various credit scores within the same bureau.

For mortgage shoppers, lenders will observe your FICO 2 score (Experian), FICO 5 (Equifax), and FICO 4 (Trans Union). So for example if you’re looking at your “Vantage” score as reported by some third party credit vendor thinking that’s what your mortgage loan officer is going to see, you’re in for a rude awakening. 

That score means absolutely nothing. I’ve seen people’s actual FICO 2 scores be over 50 points lower than what they reported their Vantage credit score as. So don’t waste your time with that. Go straight to the source to check your score.

Now that we’ve exposed probably the biggest secret in credit scoring, let’s dig into the specifics of how they calculate the scores. Technically all of the various scoring models the bureaus use are proprietary, so I can’t tell you what the exact formula/algorithm is. 

However, I can tell you what the various things are that they look at, and how important they are.

Age of Credit (15%) - This is a measurement of how long you’ve had a credit history, and the age of your accounts. The older the better.

Inquiries & New Accounts (10%) - To maximize these points you want to have a minimal amount of inquiries and new accounts. Two or less over a two year period is generally considered ideal.

Types of Debt (10%) - You will score high in this section if you have a good mix of different types of credit (credit cards, auto loans, mortgages, etc). This is why obtaining a mortgage can have a positive impact on your credit score.

Outstanding Debt (30%) - This means both your credit utilization, and the amount of available credit you have. This is why you should never close your credit cards after paying them off (assuming they don’t have annual fees that you feel don’t offer a commensurate amount of benefits).

Pay History (35%) - This is the most important factor. Most commonly a poor pay history is the culprit when people have less than favorable credit scores. This is based a what percentage of your payments have been made on-time. 100% is ideal, but try not to ever let this fall lower than 98%.
All of these factors will be in play regardless of the scoring model that is being used. What changes is how much a specific type of account (auto, revolving, installment, etc) is weighted. So your major credit focus should be paying your bills on-time, and ensuring that you keep your credit card balances as low as possible (ideally 10% of the credit limit).
Now that you understand what the credit bureaus are looking for when calculating your score, you may be entertaining hiring a credit repair agency to boost your credit score. But before you do, be sure to watch my video “the truth about credit repair”. 

I’ll be giving you some important insight on credit repair companies that will help you determine if it’s worth your time and money.
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About the Author:
Ed Andrews III

Ed Andrews III is a mortgage loan officer, and U.S. veteran of the Iraq & Afghanistan Wars. He is an expert on VA home loans, and dedicated to helping veterans achieve home-ownership.
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