How is Your Credit Score Calculated?

Quick, what’s your credit score? If you’re like most people, you’ve checked your credit at least once in the past 12 months. You probably know this number off the top of your head.

But what about how your score gets calculated? Now that’s a tougher question — and one that four out of 10 Americans don’t know the answer to.

If you don’t either, keep scrolling to find out how FICO generates your score — and how you can use this information to start building credit. 

score calculation

1. Payment History

Accounting for 35 percent of your credit, your payment history is the most important factor affecting your score.

This section of your credit report shows how you pay your debts, including mortgages, student loans, and credit cards.

Even an online personal line of credit may count towards your payment history. To understand how a personal line of credit works towards your score, read more about how some lenders report to the major credit bureaus.

FICO rewards people who pay bills on time, so one of the best ways to maintain or build a good score is by paying off debts by their due date.  

2. Amounts Owed

The next largest component of your score is amounts owed. This section reveals how much available credit you’re using, and it’s worth 35 percent of your score.

FICO may dock points if you consistently carry a large amount of debt, but it isn’t always a given. FICO compares amounts owed against your payment history to get a better understanding of your finances.

A large balance on your online personal line of credit may not lower your score if you manage to keep the account in good standing. However, it could do harm to your score if you end up missing payments.

3. Length of Credit History

This category, worth 15 percent, reveals how long you’ve held each account under your name. Generally, FICO favors older accounts over newer ones.

Why? Well, let’s compare a personal line of credit that you’ve had for 5 years with one you just opened last week.

The new line of credit may not have anything to show. But the older line has five years’ worth of payment history and amounts owed attached to it. There’s simply more data here for FICO to crunch.

If you only have new accounts, you may end up with a low score because FICO simply can’t determine anything about your payment habits.

4. Credit Mix

As with credit age, credit mix is part of FICO’s desire to collect as much data on your credit behavior as possible. Preferably, FICO wants to see you balance a wide variety of accounts under different conditions.

If you manage to keep a mortgage, installment loan, auto loan, and personal line of credit in good standing, this may help build credit.

But don’t get a personal line of credit and installment loan just to diversify your profile. Even the best personal line of credit and online loan may tank your score if you take on debt you can’t afford.

5. New Credit

It’s alright if you apply for personal line of credit loans and credit cards every once in a while. But opening several new accounts in a short period of time may flag you as a credit risk.

Many traditional lenders use a hard credit check when reviewing your application, which shows on your report. If you have several hard inquiries performed in a short amount of time, these hard checks may lower your score — especially if you don’t have older accounts to balance them out.

Knowing how a lender assesses your credit before extending a loan or line of credit can help you avoid hard credit checks. Some lenders use soft inquiries, which don’t show on your credit reports.

Bottom Line

Your credit may seem like it’s a mystery at first. But there’s actually a simple explanation behind your three-digit score. It all depends on how well you handle paying bills and managing debt.

If you plan on building credit, start by focusing on making timely payments to lower how much you owe. Everything else will eventually fall into place when you focus on these main components of your score.