Credit scoring algorithms play a critical role in assessing creditworthiness. Leading companies utilize distinct algorithms to compute these scores, with FICO being the most widely recognized. Each credit bureau—Equifax, Experian, and TransUnion—employs different scoring systems. For instance, Equifax uses the BEACON score, Experian uses the Experian/Fair Isaac Risk Model, and TransUnion relies on the EMPIRICA score.
These algorithms resemble a progress report, breaking down categories based on specific actions, each contributing a percentage to the total credit score. Here’s a general breakdown:
- Payment History (35%): This assesses your payment consistency, including timing, frequency of late payments, and any outstanding collections.
- Debt Level (30%): This looks at the amount owed across various types of credit, like loans and credit cards. High outstanding debt typically lowers your score.
- Credit History Length (15%): The longer your credit history, the better, as it demonstrates sustained financial responsibility.
- Credit Mix (10%): This considers the diversity of your credit, factoring in applications and existing credit lines. Frequent applications or numerous cards might signal financial strain, potentially affecting your score.
- New Credit (10%): New credit inquiries and recent accounts also impact the score, as too many recent credits can raise risk flags.
A strong, long-term credit strategy can enhance your score over time. By understanding these categories, you can better manage credit for optimal outcomes.