Credit Score Simulator: Credit Bureau Secret Formula
Understand the credit score simulator
used by big credit bureaus to calculate your score.
It’s the first step towards good credit.
Sometimes, it’s hard to know where to start when you’re trying to fix your credit.
A great first step is to look at the credit bureau formula, which is the equation used to calculate your score. It’s a bit like peeking at the answers in the back of a schoolbook, but this time it’s not cheating. It’s smart strategy.
We’ll help you understand the formula. It’s simpler than you might think. Plus, we’ll arm you with action steps you can take right away to move the credit needle from poor to fair to good.
Credit score simulator, the credit bureau’s secret formula
The big three credit bureaus in the United States are Experian, TransUnion and Equifax. Each bureau has a slightly different proprietary formula, but all the formulas are basically the same. We’ll focus on the FICO® Score from Experian. This is the oldest credit bureau, and their score is the most widely used by lenders making credit decisions.
Many people are surprised when they see that the FICO Score is based on a simple formula with 3 major components and 2 minor components.
- Payment history (high impact, 35% of score)
- Credit card use (high impact, 30% of score)
- Average age of accounts (medium impact, 15% of score)
- Credit mix (low impact, 10% of score)
- Hard inquiries for new credit accounts (low impact, 10% of score)
The first 2 components of the credit score simulator are payment history and credit card use. These are the high impact pieces to the puzzle. They make up 65% of your total score, so that’s where you want to focus your energy when you’re working on your credit score.
Start by subscribing to a free credit report. It will tell you your current score and provide monthly updates to measure your progress.
Scroll down to read more about each part to the formula, plus some action steps you can take to improve your score in each area.
1. Payment History – 35%
Your payment history is the single most important piece of your credit score. It tracks how often a bill gets paid late. It also tracks when an account gets sent to a collections agency. These are sometimes referred to as derogatory marks.
Action Step #1: Make the minimum monthly payment on-time, every-time.
Action Step #2: Work with a credit repair agency to remove any derogatory marks from your credit bureau report. Top agencies have an outstanding track record getting old marks taken off the report, which increases your score right away.
2. Credit Card Use – 30%
Credit card use is almost as important as your payment history. This is the percentage of your credit limit that you use each month. It is calculated by dividing your unpaid card charges by the credit limit on that card. 0% to 29% credit card use is considered good. 30% to 49% is considered a yellow flag. And anything over 50% is considered a red flag.
Here’s an example of how it works. If the credit limit on your credit card is $1,000, then you cannot charge more than $290 (or 29% of the credit limit) without making a payment on the card. Otherwise, your credit score will go down.
Action Step #1: Pay down any outstanding balances until they are less than 29% of your credit limit.
Action Step #2: Send your monthly payment before the date your balance is reported to the credit bureaus, instead of waiting for the due date on the monthly statement. A free credit monitoring service like Credit Karma will tell you the date when your bank reports your balance. This move will increase your credit score right away.
Action Step #3: Contact your credit card company and tell the customer service rep you’d like to increase your credit limit. This move will improve your credit score right away, because a larger credit limit automatically reduces the percentage of total credit use. Credit card companies will normally increase your limit after 6 months of on-time payments, but you may need to call the number on the back of the card to ask for the increase.
3. Average Age of Accounts – 15%
Lenders like to look at the average age of all your credit accounts, because it tells them how many other banks consider you to be a good credit risk. This is a category where more is better.
Action Step: Do not close an account, even after you pay off the balance. And be sure to use each credit card once or twice a year to keep the account active.
4. Credit Mix – 10%
Lenders like to see different types of credit accounts on your credit bureau report. This can include credit cards, car loans, mortgages, student loans or personal loans.
Action Step: If you already have a few credit cards, then consider adding a different type of loan. For example, apply for a personal loan to pay off high interest credit card balances. Or apply for an auto loan to cover the cost of a car.
5. Hard Inquiries – 10%
Lenders check your credit bureau report when you apply for a new credit card, personal loan, or any other type of credit account. This is referred to as a hard inquiry, and more than 5 inquiries in a 2-year period (24 months) is considered a red flag. Lenders call it the 5/24 Rule. They are more likely to approve applications with fewer requests for new credit.
Action Step: Double check the number of hard inquiries on your credit report before you apply for a new loan or credit card. You can use a free credit monitoring service to check on your hard inquiries. Make sure there are no more than 5 credit inquires during the past 24 months. Older inquiries should drop off the report automatically after 24 months.
Summary of credit score simulator
When you know how the credit bureaus calculate your credit score, you also know how to improve your score. The action steps are simple and straight forward. The tough part is taking consistent action every single month. It requires discipline, but you will be motivated to keep going when you see your score go up a few more points each month.