5 Factors That Determine Your Credit Score

How Your Credit Score Is Calculated

Woman sitting at a laptop and making an online purchase with a credit card.
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Your credit score is a three-digit number that's used to predict the likelihood that you'll pay your credit obligations on time. The score generally ranges from 300-850 and is calculated using credit history information from your credit report.

Your accounts, payment history, and inquiries into your credit are examples of credit report information used to calculate your credit score.

How Your Credit Score Is Used

When you apply for a credit card or loan, the creditor or lender uses your credit score to inform their decision on whether to issue you credit or not. The credit score gives a snapshot of how reliable you are as a borrower, which lets lenders know whether you are a good risk or not for a loan or credit card.

Lenders aren't the only ones who check credit scores, however. Your utility company, landlord, and cell phone company may all check your credit score to get a picture of how reliable and financially stable you are.

Creditors and lenders also use your credit score to set the pricing and terms for your credit card or loan. Having a higher credit score will help you qualify for lower interest rates on credit cards and loans. Having no credit history or lower credit scores will result in being offered higher interest rates, which are ultimately more expensive.

These higher interest rates are designed to lower the risk that lenders take on by offering loans or credit cards to less reliable borrowers.

How Many Credit Scores Do You Have?

While there are several different versions of the credit score, the most commonly used version is the FICO score. Developed by FICO, formerly Fair Isaac Company, the FICO score is used by many creditors and lenders to decide whether or not to extend credit to you.

The VantageScore, which was created by the three credit bureaus, is another common credit score. Many free credit score services offer the VantageScore 3.0.

What Goes Into a Credit Score?

Because some parts of your bill-paying history are more important than others, different pieces of your credit history are given different weights in calculating your credit score.

Even though the specific equation for coming up with your credit score is proprietary information owned by FICO, we do know what information is used to calculate your score.

What Makes Up Your FICO Credit Score
Payment history 35%
Amounts owed 30%
Length of credit history 15%
Credit mix 10%
New credit 10%

Payment history: Lenders are most concerned about whether or not you pay your bills on time. The best indicator of this is how you’ve paid your bills in the past.

Late payments, charge-offs, debt collections, and bankruptcies all affect the payment history portion of your credit score. The better your history of paying debts — such as loan payments or credit card bills — on time, the higher your credit score.

More recent delinquencies hurt your credit score more than those in the past.

Amounts owed: The amount of debt you have in comparison to your credit limits is known as credit utilization. The more money you already owe, the less flexible your spending is, which makes it riskier for you to take on new debt, which lowers your credit score.

Keep your credit card balance at about 30% of your credit limit or less to improve your credit score.

Length of credit history: Having a longer credit history is favorable because it gives more information about your spending habits. A longer history of reliable borrowing means your score will be higher.

Keeping accounts open for a long time will lead to higher credit score. However, you can still have a high credit score, even if you are a new borrower, if you have low amounts of debt and a history of on-time payments.

New credit: In general, people who open many new credit accounts in a short amount of time are seen as riskier borrowers. Too many applications for credit can mean that you are taking on a lot of debt or that you are in some kind of financial trouble.

Credit mix: Having different kinds of accounts is favorable because it shows that you have experience managing a mix of credit. This isn’t a significant factor in your credit score unless you don’t have much other information on which to base your score.

Opening new accounts can hurt your credit score by adding new inquiries to your credit report or lowering your average credit age. Open new accounts as you need them, not to simply have what seems like a better mix of credit.

How to Check Your Credit Score

Checking your credit score helps you predict how borrowers will view your applications for credit cards or loans. If you see that your credit score is lower than you want, you have an opportunity to improve your score before you take major financial steps, such as applying for a mortgage.

Avoid sites that claim to provide a free credit score if they mention a trial subscription or ask for your credit card information. You may be charged within a few days if you don't take some action to stop the trial.

You can check your own credit score, and you should, through any of a variety of services. There are online sites that offer free credit scores. If you have a checking account, many banks will also offer customers a chance to monitor their credit scores through their online accounts.

Article Sources

  1. Fair Isaac Corporation. "What is a Credit Score?" Accessed Oct. 11, 2020.

  2. VantageScore Solutions, LLC. "Who Uses Credit Scores?" Accessed Oct. 11, 2020.

  3. VantageScore Solutions, LLC. "Free Score Providers." Accessed Oct. 11, 2020.

  4. Fair Isaac Corporation. "What's In My FICO Scores?" Accessed Oct. 11, 2020.