How a Credit Score Formula Works

There is not just one credit score formula, there are several. Each is slightly different and your score may depend on the type of loan you are seeking. Credit score formulas are proprietary and often closely guarded secrets. In addition to the purchasable credit scores offered by these companies, simulators powered by the leading credit scoring services are available online to give you an estimate of your credit score.

The most famous credit score formula was developed by the Fair Isaac Corporation, known as the FICO score. Using 22 pieces of data gathered from your credit report, Fair Isaac assigns you a score between 300 and 850. 300 is of course awful, and 850 is excellent. Learning to raise your FICO score is not hard and may eventually help you secure a lower interest rate.

If you are unsatisfied with your credit score and seek a higher one you should first look at the criteria that credit reporting agencies use in their credit scoring formula and then take steps to improve your credit history and by extension, your credit report. FICO uses a formula based on five major factors, listed in order of importance from largest to smallest they are: punctuality of your past payments, amount of debt, length of credit history, types of credit used, and recent amounts of credit obtained. Clearly if you are trying to raise your credit score then making payments on time every month would be an excellent way to start.

It is important to note that success breeds imitation even in the credit scoring world. Various FICO-like credit scoring formulas have been developed. Some of these so called "FAKOs" do indeed offer a score similar to your actual FICO score while costing less money. However, keep in mind these, along with simulators, are good only for getting rough estimates of the scores your bank will use. More often than not, the bank is going to use your real FICO score in evaluating your loan application.

Final thoughts on the FICO credit score formula and its competitors: Don't be afraid to compare multiple sources or even use non FICO credit scoring systems. Sometimes the credit reporting agencies are not in sync with one another and your score may vary significantly because of this. Also keep in mind that FICO uses a slightly different methodology depending on the type of loan you are applying for. Your FICO score for a car loan may be as much as 50 points different from your score for a credit card application. Source : http://www.ezcreditscoring.com