How credit scores are calculated

How Credit Scores Are Calculated: A Breakdown of the Key Factors

Your credit score is a three-digit number that represents your creditworthiness—how likely you are to repay borrowed money. Lenders, landlords, insurance companies, and even employers may use this score to make decisions about your financial reliability. But how exactly is your credit score calculated?

Here’s a detailed breakdown of the key components that make up your credit score, especially focusing on the most widely used model: the FICO Score, which ranges from 300 to 850.

1. Payment History – 35%

This is the single most important factor in your credit score. Lenders want to know whether you pay your bills on time. Your payment history includes:

• On-time payments

• Late or missed payments

• Accounts in collections

• Bankruptcies, foreclosures, or charge-offs

Even one missed payment can significantly affect your score, especially if your credit history is short or otherwise strong.

2. Amounts Owed (Credit Utilization) – 30%

This measures how much of your available credit you’re using. It’s calculated as:

Credit Utilization Ratio = Total Credit Card Balances ÷ Total Credit Limits

For example, if you have a $10,000 credit limit and owe $3,000, your utilization is 30%. A lower ratio (generally under 30%, ideally under 10%) signals that you manage credit responsibly.

3. Length of Credit History – 15%

A longer credit history generally helps your score, as it gives lenders more data on your financial behavior. This includes:

• The age of your oldest account

• The age of your newest account

• The average age of all accounts

Keeping older accounts open—even if you rarely use them—can positively impact this factor.

4. Credit Mix – 10%

Lenders like to see that you can manage different types of credit responsibly. A healthy mix might include:

• Credit cards

• Auto loans

• Student loans

• Mortgages

• Personal loans

You don’t need all types, but having a variety shows financial flexibility and experience.

5. New Credit – 10%

Every time you apply for new credit, a hard inquiry is recorded on your credit report. Too many inquiries in a short period can signal financial distress and lower your score. This category includes:

• Number of recently opened accounts

• Number of recent credit inquiries

• The time since your last inquiry

Soft inquiries—like checking your own credit—do not affect your score.

Other Credit Scoring Models

While the FICO Score is the most common, VantageScore (developed by Equifax, Experian, and TransUnion) is another popular model. It uses similar criteria but may weigh them slightly differently and considers shorter credit histories more favorably.

Final Thoughts

Understanding how your credit score is calculated empowers you to make smart financial choices. By focusing on timely payments, maintaining low credit utilization, building a longer credit history, diversifying your credit types, and minimizing new credit inquiries, you can steadily build and maintain a strong credit profile. A good credit score opens the door to better loan terms, lower interest rates, and greater financial flexibility.

Would you like a visual chart summarizing the credit score factors?