How Is Personal Credit Calculated?

Credit scoring models use complex algorithms to calculate your personal credit score based on five basic pieces of financial data: 

  • History of timely payments
  • The amount of credit you use relative to your limits
  • Age of your credit history
  • Number of new credit applications
  • The diversity of your credit portfolio

Personal credit scores are just as crucial as business scores for most small business owners. If you run a relatively new operation without a financial history, your personal credit is more important. 

Potential lenders will look at your personal credit to see if your business is a safe investment, so a strong report with high scores is crucial to successful funding.

How Do Credit Scores Work?

Companies to which you owe money (including banks and utility service providers) will send information about your accounts to the three major consumer credit bureaus: Experian, Equifax, and TransUnion. 

These companies compile your credit history into reports and then use that information to calculate a numerical score.

What Factors Contribute to Your Credit Score?

Your personal credit score reflects how well you manage the funds you already have access to. This is the best predictor of whether potential creditors are likely to get their money back from you in the future. The credit bureaus consider the following factors when tabulating your score:

Payment History

Consistent on-time payments will improve your score. This includes monthly fees for bank loans, credit cards, and other outstanding debt like utility bills and medical bills. 

Paying your creditors a month in advance will bump it up even more. Conversely, the following are likely to drop your rating substantially:  

  • Late payments
  • Overdue bills or delinquencies 
  • Accounts that have gone to collections
  • Bankruptcies

Credit Utilization

A credit utilization rate is an amount that you currently owe divided by your maximum borrowing limits. If you have a $10,000 maximum limit and carry a balance of $2,500, you are using 25% of your credit potential. 

The lower your utilization, the better, and you should always keep it under 30% to maximize your score.

Length of Credit History

Establishing a trustworthy track record takes time. Consumers with a longer positive credit history are often rewarded with higher scores than less experienced borrowers who recently opened their first accounts.

New Credit Applications

An abundance of recent credit applications signals that you are under financial strain and may be getting in over your head. Each time you apply for a new account, the creditor will check your report.  

The credit bureaus register this as a hard inquiry, causing a temporary dip in your score.

Credit Mix

Creditors want to see that you can successfully manage both revolving accounts (lines of credit, charge cards, and credit cards) and installment accounts (car loans, mortgages, and student loans). 

A consumer that has set up only one type of account will probably have a lower score than someone else with a healthy mix of credit categories.

What Factors Are Not Included?

Your score can only reflect the financial data found in your credit report. Scores do not include your age, race, current income, or how long you’ve been employed.

Financial information only stays on your report for a specified period. Once enough time has passed, this data will no longer be part of your credit equation. For example, bankruptcies typically drop off your report after seven to 10 years, and hard inquiries last up to two years.

Two Scoring Models

Your score’s precise calculations will depend on which of the two major scoring models is used — FICO or VantageScore.

FICO Score Calculations

When you apply for a loan or line of credit, the lender will most likely check your FICO score. The scoring system fluctuates from industry to industry, so the FICO score formulated for a mortgage loan officer would be different than if you applied for a car loan or a credit card.

FICO won’t reveal the details of exactly how they come up with your personal credit scores, which range from 300 to 850. However, they have released some general guidelines to indicate which criteria they weigh more heavily in their calculations than others.

  • Payment history — 35%
  • Credit utilization — 30%
  • Length of credit history — 15%
  • Credit mix — 10%
  • New credit applications — 10%

VantageScore Calculations

Since 2006, Experian, Equifax, and TransUnion have offered VantageScore as an alternative to FICO scores. Initially, this system had a scoring range from 501 to 990; however, in 2013, VantageScore adjusted their numbers to match FICO’s 300-850 range.

VantageScore weighs your financial data differently than FICO does. Their calculation is expressed as a degree of influence rather than a percentage:

  • Credit utilization — Extremely influential
  • Credit mix — Highly influential
  • Payment history — Moderately influential
  • Length of credit history — Less influential
  • New credit applications — Less influential

How Often Is Your Credit Score Updated?

There is no regular interval for credit score updates. Instead, the data on your report will change anytime new information is received from one of your creditors. Hard inquiries will also trigger an immediate update. 

Since your score could update at any time, you should regularly access your report to make sure there are no data errors. If your business relies on your personal credit score for financing, this form of due diligence is even more critical.

The Cost of Poor Credit, and How Revenued Can Help

Poor credit due to late payments or excessive debt will hurt your company’s chances of acquiring capital. Most traditional lenders require excellent credit scores and at least two years of operational history to consider you for a loan. 

Revenued can qualify applicants having poor credit and only six months operational history for its business card. Find out how your company can benefit from this innovative financing opportunity by calling +1 (877) 662-3489 or complete our contact form today.

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