How is Your Credit Score Calculated?

The most important item in a consumer's financial resumé today is his or her credit score. The one most widely used is the "FICO" (Fair Isaac Corporation) score, the standard measure for credit risk. This score was developed in 1989 as a joint project by Equifax and the Minneapolis-based Fair Isaac Corporation, which provides financial services to the world's 10 largest banks, as well as companies in more than 60 countries.

The scoring system awards points for each factor that can help predict the likelihood of a person repaying debts on time. The total number of points -- the credit score -- predicts how creditworthy a person is. The FICO score, a three-digit number between 300 and 850, is a snapshot of a person's financial standing at a particular point in time. The higher a credit score, the more likely a person is to be approved for loans and receive favorable interest rates.

FICO scores are calculated from a lot of different credit data in your credit report. The percentages in the chart reflect how important each of the categories is in determining your score. These percentages are based on the importance of the five categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different

The best credit rates are given to people with scores above 770, but a score of 700 -- out of a possible 850 -- is considered good, according to Fair Isaac. The median score is about 725. Generic interest rate calculations on the myfico.com Web site show that when the score dips below the mid-600s, those consumers generally qualify only for "subprime" lending and the interest rate starts to climb significantly.

Fair Isaac Corporation does not maintain a database of FICO scores, as many assume. Instead, when a lender requests a credit rating, the score is generated by one of the national credit bureaus from which the lender has requested the report. Fair Isaac provides the credit bureaus with software containing an algorithm -- a mathematical formula derived from random samples of consumers' credit information -- and that is what is used to calculate the score.