How Is Your Credit Score Calculated?


Ever wondered how your credit score is calculated? Or why certain financial behaviors seem to affect your score more than others? To simplify the process, we’ll explore the basics of credit scoring models and the key factors that go into calculating your credit score.

This essential three-digit number plays a crucial role in your financial life, impacting everything from your ability to secure mortgage loans to how much interest you’ll pay on credit cards. So, strap in and prepare for a crash course in credit education.

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The Meaning of Credit Score

In simple terms, a credit score reflects your creditworthiness. It’s a numerical summary based on your credit history accounts, bill payment habits, the number and type of accounts you have, outstanding debts, and other factors. It’s akin to a financial report card, with lenders, credit card issuers, and even some employers reviewing it to gauge how responsibly you manage your finances.

There are several credit scores available, but the most widely used are FICO Score, developed by the Fair Isaac Corporation, and VantageScore, developed by the three major credit bureaus: Equifax, Experian, and TransUnion. Scores usually range from 300 to 850, with higher numbers representing a better credit risk.

Major Credit Scoring Models

FICO Score and VantageScore are the two major credit scoring models. While they use much of the same information from your credit reports, they calculate credit scores somewhat differently.

FICO scores have been around since the 1980s and are used by many lenders. This scoring model places considerable weight on your payment history and amounts owed, followed by length of credit history, credit mix, and new credit.

On the other hand, the VantageScore, which debuted in 2006, was a collaborative effort by the three major credit bureaus to create a more consistent scoring model. While it also emphasizes payment history and credit utilization, it can score people with shorter credit histories, allowing more people to have a credit score altogether.

Five Factors that Affect Your Credit Score

1. Payment History

Your payment history — whether you’ve made your credit card and loan payments on time — is one of the most significant factors in both the FICO and VantageScore models. Late or missed payments, especially recent ones, can seriously damage your score.

Payment history also includes account details, such as whether you’ve had any accounts referred to collections, or declared bankruptcy. Remember, some negative information can stay on your credit report for up to seven years or longer.

2. Credit Utilization Ratio

The credit utilization ratio is the percentage of your available credit that you’re currently using. It’s calculated by dividing your total credit balances by your total credit limits.

Credit scoring models generally penalize high utilization rates, which they see as a signal of potential financial distress. Ideally, you should aim to keep your ratio below 30% on each of your credit card accounts and across all your revolving credit lines.

3. Length of Credit History

The length of credit history accounts for about 15% of your FICO score. It considers the age of your oldest credit account, the average age of all your accounts, and the age of specific account types.

A longer credit history typically results in a higher score, as it provides more information about your borrowing behavior.

4. Credit Mix

Credit mix refers to the types of accounts included in your credit report — such as credit cards, retail accounts, installment loans (like auto loans and mortgage loans), finance company accounts, and others.

Having a mix of installment credit and revolving credit shows that you can manage different types of credit, and this diversity may positively affect credit scores. While it’s not necessary to have one of each, handling a variety of debt products can showcase your ability to manage multiple financial obligations.

5. New Credit Inquiries

Each time you apply for credit, it can result in a hard inquiry, or a record of the lender checking your credit due to your application. These hard inquiries can affect your credit score, especially if you have several in a short period. This is because potential lenders may view multiple inquiries as a sign that you’re in financial trouble or may take on too much new debt.

How to Improve Your Credit Score

Understanding how your credit score is calculated is the first step towards improving it. Now, let’s look at ways to polish your financial profile:

  1. Prompt payments: Pay all your bills on time, including utility bills, loan repayments, and credit card balances. This helps establish a reliable payment history, which is a significant factor in credit score calculations.
  2. Manage your credit utilization ratio: Keep your credit card balances low compared to your total available credit. If possible, pay off your balances in full each month.
  3. Don’t close unused credit cards: Unless a card carries an annual fee, keep it open. Having more available credit from open credit accounts lowers your credit utilization ratio.
  4. Limit new credit applications: Apply for new credit accounts only as needed. Not only can hard inquiries affect credit scores, but also opening many new accounts rapidly can lower the average age of your credit accounts.
  5. Diversify your credit mix: Over time, try to demonstrate that you can handle a variety of credit types responsibly, such as credit cards, auto loans, and installment loans.

Understanding Credit Reports

Your credit report is a detailed record of your credit history provided by the credit bureaus. It includes the types of credit accounts you have, the length of time they’ve been open, whether you’ve paid your bills on time, and whether you’ve filed for bankruptcy or had a lawsuit judgment against you.

Each credit bureau collects information about your credit history, and this information may be slightly different across bureaus because not all creditors report to all three. You’re entitled to a free credit report from each of the three credit bureaus (Equifax, Experian, and TransUnion) every 12 months through

Common Misconceptions About Credit Scores

There are numerous misconceptions surrounding credit scoring. Here are a few:

Myth: Checking your own credit report will damage your score.
Fact: This is a soft inquiry that does not affect credit scores.

Myth: You need to carry a credit card balance to build a good credit score.
Fact: You don’t need to carry debt to have a good score. You can use your credit card and pay off the balance in full each month, which can actually contribute to a good credit score.

Myth: All credit scores are the same.
Fact: Different credit scoring models can produce different scores. For instance, your FICO credit score may differ from your VantageScore.


Understanding how your credit score is calculated can empower you to take control of your financial health. By being mindful of the key credit scoring factors — payment history, credit utilization, length of credit history, credit mix, and new credit — you can make informed decisions that help boost your credit score over time.

Remember, a good credit score can open the door to a variety of financial opportunities. Stay diligent, make your payments on time, and strive for a diverse, balanced credit portfolio for optimal results.

Frequently Asked Questions

Does closing a credit card account affect my credit score?

Yes, closing a credit card account can negatively impact your credit score. It reduces your overall available credit, which can increase your credit utilization ratio, and it can also affect the average age of your credit accounts.

If I cosign a loan, will it affect my credit score?

Yes, cosigning a loan can affect your credit score. If the primary borrower fails to make timely payments, your credit score could be negatively affected because you are also responsible for the debt.

Can employers check my credit score?

While employers can request a version of your credit report with your consent, it’s worth noting that this report does not include your credit score. Instead, it contains information about your credit history.

If I have a poor credit score, can I still get a loan?

Yes, it’s possible to get a loan with a poor credit score, but it may be more challenging. You may be offered higher interest rates or less favorable terms because lenders may perceive you as a higher risk borrower.

How frequently should I check my credit report?

It’s recommended that you check your credit report at least annually. This will help you spot any errors and keep track of your credit history. Remember, you are entitled to one free credit report from each of the three major credit bureaus per year.

How quickly can I improve my credit score?

The length of time it takes to improve your credit score depends on a number of factors, including the types of negative items on your report, your current score, and your personal financial habits. Some changes can result in a quicker score increase, while others may take longer.

Do utility payments affect my credit score?

Most utility companies do not report on-time payments to credit bureaus, but they may report late payments, which can have a negative impact on your credit score. However, some credit scoring models, like the newer versions of VantageScore, are starting to consider alternative data like utility payments in their calculations.

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