Your credit score is a three-digit number with an outsized impact on your financial life. Understanding how your credit score is calculated can make it easier to build a strong credit record that will help you open doors and opportunities.

The formulas that determine your credit score aren’t just random facts. Understanding them can help you make better financial decisions.

Where Do Credit Scores Come From?

The information contained in your credit reports is the basis of your credit score. Creditors submit this information voluntarily in reports to the three major credit reporting companies: Experian, Equifax and TransUnion.

💡 If you’d like to get a copy of your credit report know that each credit reporting company is obligated to provide you with one free credit report every year.

☝️ Not all creditors report to all three of these companies, and they may report on different schedules. That means that your three credit reports will often be slightly different, and may be significantly different.

Credit score providers process this information using proprietary algorithms, and produce your credit score. There are two primary credit score providers.

  • FICO, or the Fair Isaac Corporation, has been in business since 1956 and is the dominant provider of credit scores. Most lenders use FICO scores to assess creditworthiness.
  • VantageScore was initiated in 2006, a joint project of Experian, Equifax, and TransUnion. Most providers of free credit scores use VantageScore.

😕 Your lender is probably using a FICO score and your free credit score provider is probably using VantageScore. That means you may be looking at different scores, which could cause some confusion.

Your credit score is not held on file and is updated on a schedule. Each score is generated as a response to a request. It’s a snapshot of your credit file at the time of a given request, and it can change from day to day as new information is reported.

How Your FICO Credit Score Is Calculated

Your FICO credit score is calculated using five credit factors.

Let’s unpack what each of the five contributing factors means, and how they affect your credit score calculation.

1. Payment History

This is the item most consumers associate with credit scores. It’s also the largest single component in the calculation, with a 35% weight. Naturally, this factor takes your payment performance into account. It also measures that history against the total amount of credit you have outstanding.

👉 For example:

If you have three credit lines that have been in existence for less than three years, a single late payment will have a greater negative impact on your credit score than it would if you had 10 credit lines open for the past seven years.

A large number of positive entries will dilute the impact of a single negative entry.

2. Amounts Owed

If you’ve ever heard the term “credit utilization,” this is where it figures into the mix. Though the amounts owed represent 30% of your credit score calculation, it’s not based on a fixed amount of debt. Rather, it’s based on the percentage of your available credit that you are actually using.

👉 For example:

Let’s say you have credit card lines with a total limit of $20,000, on which you owe $8,000. That will give you a credit utilization ratio of 40%.

Scoring models also consider utilization on each account: one maxed-out card can hurt you even if your overall utilization is low.

The credit scoring models perform similar calculations with installment loans.

👉 For example:

If you have a car loan with an original balance of $20,000, on which you still owe $18,000, your utilization on that loan will be 90%.

The credit scoring models favor credit utilization ratios below 30%. That’s not a fixed boundary and your score won’t fall off a cliff if you cross it, but it’s best to stay below it. Lower is even better, but you don’t want a credit utilization ratio of zero, which indicates that you aren’t using credit at all.

FICO’s “high achievers” – people with credit scores from 800 to 850 – have an average credit utilization of 4%[2].

3. Length of Credit History

This factor makes up 15% of your score and plays a much smaller role in your credit score calculation than payment history and amounts owed. It still can make a substantial impact on your credit score.

Credit scoring models reward consumers with longer credit histories. For example, if you’re fresh out of college and have only two credit lines – the oldest being one year – your credit history will be shorter than it will be for someone who has multiple credit lines open for the past decade.

Length of credit history determines how long you’ve been managing credit. The longer you’ve been doing so successfully, the more you help your score.

📘 If you have no credit history read our guide on how to build credit at 18 (or any other age).

4. Credit Mix

Credit scoring models reward credit balance. For example, if you have a mortgage, a car loan, and five credit cards, you’ll have a better credit mix than you would if your entire credit profile was limited to just five credit cards.

The reason credit mix is considered important is that it shows the consumer’s ability to successfully apply for different forms of credit and the ability to manage multiple financing types in combination successfully.

☝️ Scoring models prefer to see a balance between revolving credit, like credit cards, and installment credit, like a car loan, student loan, or mortgage. If you only have a single type of debt, you’ll be penalized for overreliance on that type of financing.

5. New Credit

Credit scoring models have an inherent preference for established debt. That’s because your payment history can easily be measured, making it easier to predict successful management of the loan. New credit, on the other hand, is an X factor. There’s no history to show how well you’ll handle that new credit line.

⚠️ Applying for a lot of new credit quickly can mean that you’re desperate for credit.

This makes a strong case for adding new credit only when you really need it. If you have two open credit lines, then apply for three new ones within one year, the scoring models will consider you to be a greater risk. Every time you apply for new credit a hard inquiry will register on your credit report, and multiple hard inquiries can harm your credit.

☝️ One exception to this rule: if you’re shopping for a loan and keep your inquiries within a 15-day period, the credit reporting companies will recognize that you are shopping and register only a single hard inquiry.

How Your VantageScore Is Calculated

Your VantageScore credit score is calculated using somewhat different criteria, and VantageScore weights those criteria according to its own algorithms. VantageScore doesn’t provide percentages, but rates the overall influence of each component it uses.

  1. Total Credit Usage, Balance, and Available Credit are “extremely influential”. This includes credit utilization.
  2. Credit Mix and Experience are “highly influential”.
  3. Payment History is “moderately influential”.
  4. Age of Credit History is “less influential”.
  5. New Accounts Opened is “less influential”.

This breakdown is different from the formula used by FICO, and explains why VantageScore and FICO may generate different scores.

What Does Not Affect Your Credit Score?

There are a number of items that do not have any impact on your credit score.

  • Race, color, religion, national origin, gender, or marital status. Federal law prohibits the use of any of these factors in determining credit status.
  • Occupation, salary, or employment history. Lenders will evaluate this information, but they won’t get it from your credit report.
  • Your age. Neither FICO nor VantageScore considers your age as a factor in your credit score.
  • Tax liens, alimony, and child support obligations. Lenders may find these through a public records search, but they do not appear on credit reports.
  • Participation in credit counseling. Credit counseling agencies don’t report to the credit bureaus, so participation in credit counseling or a debt management plan will not appear on your credit report.

☝️ Your credit score is about how well you handle debt, not about how rich you are. A low-income person who makes every payment on time can have a higher credit score than a well-off individual who habitually misses payments.

Bottom Line

You should know how your credit score is calculated because that knowledge will help you improve and maintain your credit score. Understanding the variations in credit scores can help you plan your credit more effectively. If you ask which scoring model a lender uses before making an application for credit, you’ll have a better idea of what to expect!

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