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How Are Credit Scores Calculated? Thumbnail

How Are Credit Scores Calculated?


As an immigrant, you faced a lack of credit history when you came to the United States. Since then, you have worked on building it up. A healthy credit score is essential for easily managing your finances and credit applications. Now that you have a credit score, you are wondering how they calculated it. 

A credit score can range from 300 to 850. However, many people fail to realize that they won’t have just one credit score. Your credit score will vary by company, and could be based on different timeframes and different methods of calculating it. So, don’t be surprised if you login to separate accounts and see varying credit scores.

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What’s in Your FICO Score?

Despite there being different methods of calculating your credit score, or FICO score, there are similarities across all companies. They will look at: the number of accounts you have, the types of accounts, your used credit vs. your available credit, the length of your credit history, and your payment history. Each company will just weigh these differently in their calculations. 

Essentially, your credit report is used inside of an algorithm to produce a credit score. Understanding what these factors mean will help you to positively build and maintain your credit score. As a result, you will be able to apply and be approved for different kinds of credit with better interest rates. 

Fair Isaac Corporation (FICO), states that your credit score is grouped into five categories.

Payment History

Payment History makes up 35% of your credit score, and is arguably the most important factor. It shows lenders if you’ve kept up with payments on your credit accounts over the years, and if you’ve paid your bills on time. Overall, this shows a lender how risky it will be to extend you credit. 

Tip: Set-up automatic payments for your bills so they are always paid.

As an immigrant, you may not have a well-established payment history. However, you can continue to build this up by making every payment on time and in full.

Negative impacts: Late payments, missed payments, accounts in collections, liens, foreclosures, bankruptcy and judgements

Amounts Owed or Debt Usage

Amounts Owed makes up 30% of your credit score. This factor looks at how much of your available credit you are using. This is also called your utilization ratio. It can indicate that you are overextended if you are using a lot of your credit, or are close to maxing out your lines of credit. For this reason, you could be considered as higher risk for defaulting or missing payments.

Tip: Try to keep your debt usage below 30% but ideally 10%.

When you’re new to the United States, it can be tempting to utilize credit to get yourself settled into your new life. However, you should be careful with the amount of credit you are using so you don’t overextend yourself. 

Negative impacts: Maxed-out credit cards, too many accounts with high balances

Length of Credit History

Length of Credit History makes up 15% of your credit score. It’s essentially a measure of how long you’ve been managing your credit accounts.

When calculating, they will look at how long you have had your credit accounts, including the following:

  • The age of your oldest account
  • The age of your newest account
  • Average age of all your accounts

They also analyze how long specific credit accounts have been opened and how frequently you utilize certain accounts.

Tip: Consider keeping your oldest credit line open, as it helps your credit score to have an established history.

For some immigrants, this factor may have lower scores than others because you are new to establishing credit. However, don’t let this deter you! This is only one factor in calculating your credit score, and it will improve as time moves on.

Negative Impacts: No credit history, little credit history, or too many recently opened accounts.

Related Article | An Immigrant’s Guide To Building a US Credit Score

New Credit

New Credit accounts for 10% of your credit score. They watch out for the number of credit accounts that have been opened in a short amount of time because this presents greater risk to lenders.

The number of credit inquiries on your credit report makes up this portion between soft inquiries and hard inquiries.

Soft Inquiries:

  • Your credit is checked for reasons other than determining your eligibility for a credit line.
  • These inquiries do not impact your credit score, but stay on your credit report so you know who’s viewing your information. They don’t appear for anyone else but yourself.
  • EX: asking for a copy of your own credit reports, a promotional review, employment hiring process, existing lender reviewing your history

Hard inquiries:

  • Your credit is checked to determine if a lender should approve your credit application.
  • These inquiries have a negative impact on your credit report for one year, but stay on your credit report for 2 years. They are visible to anyone who pulls your credit report.
  • EX: car loan, student loan, mortgage, credit card

Tip: Only open lines of credit that you need. Space out the rest of them over longer periods of time.

For immigrants just starting to build their credit, this factor can also be difficult because all of your accounts will be new. Don’t open too many accounts too quickly. You can space them out, if possible.

Negative impacts: The number of new accounts you have opened in the last 2 years

Credit Mix or Types of Accounts

Credit Mix accounts for 10% of your credit score. FICO will consider what kind of mix your credit accounts are. These can include credit cards, retail accounts, all types of loans and finance company accounts.

Tip: Show your ability to manage different kinds of credit by utilizing a credit card, mortgage loan and auto loan.

When just starting to build your credit, be sure to balance the number of credit accounts and the type you are opening. Lenders like to know that you can handle different kinds of credit. 

Negative Impacts: Only having one type of credit account in your credit history

Related Article | Green Card Applicants May Soon Need a Good Credit Score

What Tools Can I Use to Track My Credit Score?

There are many free tools available that you can use to keep track of your credit reports and credit scores. It’s important that you keep track of them regularly, not only to see your progress but also to prevent identity theft. If you see any fraudulent activity, you can take steps right away to correct it.

Receive a Copy of Your Credit Report Annually for Free

TransUnion, Equifax and Experian are the bureaus that maintain credit reports. Every year, you are entitled to a free credit report from each of these agencies. 

You can order your credit reports at Annual Credit Report online.

Tools Like CreditWise

You will find that many of your credit cards offer free credit score tracking that doesn’t affect your credit report when you sign into your online account. CreditWise is a free credit monitoring application that Capital One offers to their credit card holders. 

They even give you reasons why your score was impacted and ways that you can improve it. The simulator is one of the most unique tools. You can see how different events will increase or decrease your credit score from paying off a credit card or loan to not paying a bill on time.

Related Article | Top 10 Immigrant Money Questions 

Now that you know what goes into calculating your credit score, take actionable steps today to change how you approach your credit usage. You may consider changing your spending habits, payment strategy or planned credit applications. By keeping these factors in mind, you will be on your way to an excellent credit score in no time.

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