How Is Your Credit Score Calculated?

The subject of credit scores may not make for fascinating dinner conversation, but they’re actually incredibly important. Your credit score can determine whether you’ll be approved for a mortgage, a loan or credit card, and even whether a landlord will rent to you. It also plays a large role in the interest rate you’ll receive on loans and credit cards.

Credit scores are calculated using these five key factors from data gathered in your credit reports: Payment history, amounts owed, length of credit history, new credit and credit mix.

We’ll explore the five factors and examine how they impact your credit score in depth below.

What is a credit score?

A credit score is a three-digit number that typically ranges from 300 to 850. Lenders use this score to determine your creditworthiness. In their view, the higher your score, the more likely you are to repay your loans or credit card debt. Building a good to excellent credit score can make it easier to qualify for loans and credit cards and can also improve the interest rates you’re offered when you apply.

It is a common misconception that you only have one credit score. In reality, there are many different credit scoring models, and lenders may use different scores for different purposes.

For example, FICO, the most commonly used credit score in the U.S., creates base credit scores and industry-specific credit scores for auto lenders and credit card issuers. It also updates its credit-scoring models regularly, and your score may vary depending on which model a creditor uses.

However, FICO’s is not the only credit score. Credit card issuers, lenders and other creditors may also use a credit score from VantageScore, a competitor to FICO.

The major credit bureaus themselves also develop their own credit scores based on their credit reports; lenders may also utilize their own proprietary credit-scoring models instead of, or in addition to, FICO, VantageScore, or bureau scores. In other words, if you’re checking your credit score, be aware that there isn’t just one score.

How is a credit score calculated?

Credit-scoring algorithms are industry secrets, but credit-scoring companies do reveal the basics of which factors affect credit scores and how they are calculated.

It all starts with your credit reports. Your creditors regularly report on five factors that determine your credit score: payment history, amounts owed, length of credit history, new credit and credit mix. This information is reported to the three credit bureaus: Experian, Equifax and TransUnion. Each credit report contains information, such as your history of payments on credit accounts, whether you have any accounts in collections and other personal data and public records, such as bankruptcy filings.

This information is then turned into an easily graspable number: your credit score. Think of it like your grade point average in school — all of your exams (i.e., credit activity) are included on your credit report, and the credit score is your final GPA.

The fact that there are several different companies calculating credit scores means that your credit scores won’t necessarily be identical. They can vary depending on which credit report the score is based on and what credit-scoring model is used.

How each of the five factors affects your credit score

Each of the five factors used to determine your credit score are weighted differently, as follows. Understanding each factor and its relative importance to the score is crucial, especially if you’re working to improve your score.

Payment history (35%)

Your payment history is the most important factor in your credit score, making up 35% of the total score. Your payment history reflects whether you’ve made past loan and credit card payments on time. It also reflects other data about your payments, such as the number of times payments have been late and the length of any past-due period.

If your payment history is negatively affecting your score, you may be able to improve it by paying your bills on time in the future. A late payment can stay on your credit report for up to seven years, but its negative impact will diminish over time if you establish a positive payment record.

Amounts owed (30%)

The amount of revolving debt (such as credit cards or other lines of credit, but not installment loans) you carry is responsible for 30% of your credit score. The reports look at both the amount you owe across each individual account and the total of all your revolving accounts.

The credit bureaus use “amounts owed” to calculate an important figure: your credit utilization ratio. The credit utilization ratio is the percentage of credit you’re using of your total credit limit. It is calculated for each credit account and the total of all credit accounts. (Installment loans, like mortgages or auto loans, do not factor in.)

To calculate your credit utilization ratio for an individual card, divide your current credit card balance by the credit limit on the card. If, for example, you currently owe $1,000 on a credit card with a $4,000 limit, your credit utilization ratio for that card is 25%.

To calculate your overall credit utilization ratio, add up all of your credit balances and divide that figure by the sum of all your credit limits.

A credit utilization ratio that is too high (either individual or total) will negatively impact your credit score because it indicates to lenders that you may have trouble managing your revolving credit debt. Financial experts recommend keeping your credit utilization ratio below 30% to maintain a good credit score.

Tip: The credit utilization ratio is one of the few credit-scoring factors you have the power to change quickly, leading to a credit score boost. If you pay down your credit cards or other revolving accounts, you may see an increase in your score as soon as the next billing cycle. 

Length of credit history (15%)

The length of your credit history accounts for 15% of your credit score. It is based on three primary factors:

• The amount of time your credit accounts have been open (including your oldest account, your newest account and the average of all your accounts)
• How long ago specific credit accounts were established
• How long it has been since you used certain accounts

Generally, the longer your credit history, the better it is for your credit score.

You can get a rough idea of your credit history length by adding the number of years each of your cards has been open, then dividing that amount by your total number of cards. If it’s 2022, for example, and you opened cards in 2020, 2018 and 2010, the average time you’ve had credit is six years. Note that your average length of credit drops every time you open a new account, potentially lowering your score.

Closed accounts continue to affect the length of your credit history and may affect other factors as long as they appear on your credit reports. Accounts don’t immediately disappear from your credit reports after they’ve been paid off or closed.

Instead, the credit bureaus remove them on a schedule based on payment history. If you never made a late payment, a closed account will be removed from your credit report after 10 years. If you did have a late payment, on the other hand, the account will disappear from your reports seven years after the first time you paid late.

New credit (10%)

Applying for new credit accounts and the length of time since you last opened a new account makes up the remaining 10% of your credit score.

When you apply for new credit, a lender will perform a hard inquiry on your credit report. Each hard inquiry will lower the score by a couple of points. Hard inquiries stay on your report for two years, although the impact diminishes over time.

Multiple hard inquiries in a short period may signal to lenders that you are a high-risk consumer and cause your application to be denied. However, if the inquiries stem from rate shopping for a mortgage, auto loan or student loan within a 45-day window, most lenders will count it as just one hard inquiry.

It’s worth noting that soft inquiries, which occur when you check your own credit score or when a creditor preapproves or prequalifies you for an offer, don’t impact your credit score because you are not actually getting new credit when the inquiries are received.

Credit mix (10%)

Your credit mix consists of the different types of credit accounts and loans you have, including credit cards, retail accounts, installment loans, mortgage loans, and finance company accounts.

Maintaining a diverse variety of accounts helps lenders see that you can capably manage different types of financial obligations. You are not required to have one of each type, but a good mix can improve your score.

Experience with a specific account type may exert more influence on some industry-specific credit models. A history of on-time payments on a car loan, for example, may positively affect an auto-industry score more than a general credit score.

What doesn’t affect your credit score?

Some personal and financial information may appear on your credit report but is not used to determine your credit scores. This includes:

• Age, sex, gender, race, nationality, ethnicity or area of residence
• Your income, assets, employment status or job title
• Religious or political affiliations
• Marital status
• The interest rates you pay on existing accounts
• Whether you receive public assistance or have used credit counseling
• Anything that isn’t in your credit report

How to maintain a solid credit score

Once you understand the factors that determine your credit score, you’ll have a good idea of how to improve your score. Luckily, the actions that can maintain a good to excellent credit score and improve a poor-to-fair one are the same. They include:

• Pay your bills on time every month, and in full if possible
• Maintain low balances
• Avoid closing your credit card accounts
• Try not to open many new accounts, especially in the same time frame
• Use a robust variety of accounts

It’s also a good idea to check your credit score often. Not only can you identify areas of improvement, but disputing errors on your credit report can help to recover your score if the disputed item has negatively impacted it.