How Your Credit Score Is Calculated

Understanding Your FICO Score and How It Affects Home Buying

Illustration of two floating heads, one male one female. Next to the heads are iphones displaying credit scores. The woman's credit score is 742, and the man's is 490. Text up top reads: "The Credit Score Breakdown" and beneath is a pie chart broken up as follows: "Payment history: 35%, amounts you owe: 30%, length of your credit history: 15%, types of credit used: 10%, new credit: 10%"

Image by Daniel Fishel © The Balance 2019

Your credit score can have a significant effect on your ability to buy a home. At the very least, it can help decide just how much home you can afford.

Ultimately, your FICO score is a major factor in how much your lender will approve for your loan, along with the interest rate and other terms. Before you buy a house, you should know your score—and know what factors can impact it.

Key Takeaways

  • A credit score is a number (typically between about 300 and 870) that conveys your riskiness as a borrower to any potential lenders.
  • The average U.S. credit score in 2020 was 710.
  • Your payment history, current debt levels, types of credit accounts, and the average age of your credit accounts all impact your credit score.
  • If you want to improve your credit score, the two most important factors are payment history and debt levels, but keep in mind that credit scores move slowly so you'll need to be patient and persistent.

What Is a Credit Score?

A credit score is a number that lenders use to estimate risk. Experience has shown them that borrowers with higher credit scores are less likely to default on a loan. The higher your score, the more your financial history indicates that you'll be a responsible borrower.

Credit scores are based on information in your credit report, which contains financial history about you reaching as far back as seven to 10 years.

How Are Credit Scores Calculated?

Credit scores are generated by plugging the data from your credit report into software that analyzes it and cranks out a number. The three major credit reporting agencies don't necessarily use the same scoring software, so don't be surprised if you discover that the credit scores they generate for you are different.

The software used to calculate a great number of credit scores was created by Fair Isaac Corporation (FICO), but VantageScore is also widely used.

The Most Important Numbers

The illustrated pie chart above shows a breakdown of the approximate value that each aspect of your credit report adds to a credit score calculation. Use these percentages as a guide:

  • Your payment history—35%
  • Amounts you owe (your credit utilization ratio)—30%
  • Length of your credit history—15%
  • Types of credit used (your credit mix)—10%
  • New credit—10%

Payment History

Your payment history includes the number of accounts you paid as agreed. This section also covers any negative public records or collections that may be included under your name as well as information on delinquent accounts. The delinquent account information will include:

  • Total number of past due items
  • How long you've been past due
  • How long it's been since you had a past due payment

Any time you're late on a minimum payment on a loan or credit card, it will negatively affect your payment history.

What You Owe

This factors in your total loan balances and the portion of your revolving credit lines you're using compared to your credit limit. Your score factors in such things as:

  • How much you owe on accounts and the types of accounts with balances
  • How much of your revolving credit lines you've used—looking for indications you are overextended (this is your credit utilization ratio)
  • Amounts you owe on installment loan accounts vs. their original balances—to make sure you are paying them down consistently
  • Number of accounts with a balance

Length of Credit History

This category isn't as weighty to lenders as the first two, but it's still significant because it shows lenders how long you've had credit and built a history, The longer your (good) history, the better your scores. This includes:

  • The total length of time tracked by your credit report
  • Length of time since accounts were opened
  • The time that's passed since the last activity

Types of Credit

A mixture of account types usually generates better scores than reports with only numerous revolving accounts (such as credit cards), as this indicates you're not relying too heavily on any one kind of credit. Your score will factor in how balanced your credit mix is between credit types of credit:

  • Short-term installment loans such as auto loans
  • Long-term installment loans such as a mortgage
  • Revolving credit such as credit cards or home equity lines

Your New Credit

The final category influencing your score is your new credit. This factors in items such as:

  • How many accounts you've recently opened
  • The proportion of new accounts to total accounts
  • The number of recent credit inquiries
  • The time that's passed since recent inquiries or newly opened accounts
  • If you've re-established a positive credit history after encountering payment problems
  • That you aren't generally attempting to open numerous new accounts

Credit scoring software only considers items on your credit report. Lenders typically look at other factors that aren't included in the report, such as income, employment history, and the type of credit you are seeking.

What's a Good Credit Score?

Credit scores usually range from 300 to 850. The higher your score, the less of a risk a lender believes you will be. As your score climbs, the interest rate you are offered will probably decline.

Borrowers with a credit score over 670 are typically offered more financing options and better interest rates, but don't be discouraged if your scores are lower. There's a mortgage product for nearly everyone.

According to a report from Experian, the average credit score in the U.S. reached a record high of 710 in 2020. Additionally, 69% of Americans had a "good" score of at least 670.

Improving Your Credit Score

If you're thinking about buying a house, but your credit isn't where you'd like it to be, now you know what you can do to fix it. Improve any of these areas—especially the first two—for a few months and you will start to see your score rise. Be patient, though. It takes time to build a strong credit history.