Here Is How Your Credit Score Is Calculated

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• Credit scores are calculated from information on your credit reports by credit scoring algorithms like FICO and VantageScore.
• The main factors that affect credit scores are payment history, credit utilization, and length of credit history.
• Anything excluded from your credit report, like utility payments or income, doesn't affect your credit score.

Your credit score is one of the most important numbers for your personal finances. Your credit score can determine whether you can borrow money and at what cost. An excellent credit score can save you thousands of dollars in interest payments.

When you track your credit score through whatever credit monitoring service you use, you may notice seemingly arbitrary fluctuations in your credit score from month to month. However, your credit score is a reflection of information on your credit reports. Understanding how credit scoring algorithms like FICO and VantageScore calculate your score your credit score will clarify the relationship between your money habits and your credit score. More importantly, you can use this understanding to improve your credit score. 

How is your credit score calculated?

Unfortunately, FICO and VantageScore keep their exact credit scoring algorithms under wraps. However, we have a general idea of what factors impact your credit score and how heavily they're weighed. VantageScore and FICO calculate their credit scores similarly, with a few variations. The full breakdown is as follows: 

This is a lot of information to digest all at once, so let's dig into each factor.

Payment history

The most important factor in your credit score is your payment history, making up 35% of your FICO score and 40% of your VantageScore. Payment history looks at how consistently you've paid bills in the past, counting on-time payments as positive information and late payments, usually at least over 30 days late, as negative information. Your payment history reaches back as far as 10 years.

Paying off your bills every month is the single best thing you can do for your credit. A survey of Americans with excellent scores found that 100% of them had a perfect payment history with no delinquencies. 

On the other hand, a delinquency on your credit report can set your credit score back a few points. The higher your credit score pre-delinquency, the greater the impact a delinquency will have on your credit. While the amount of money in delinquency won't change anything, the amount of time it remains in delinquency does. Your payment first falls into delinquency after it's 30 days late, and its impact deepens with each subsequent 30-day period.

However, a delinquency won't permanently dent your credit report. It will drop off after seven years, with its effects fading as it gets closer to falling off.

Credit balances

Your credit balances and utilization are the next most significant factor in your credit score, making up 30% of your FICO score and 20% of your VantageScore. This category looks at the ratio between the credit you currently use on your revolving credit accounts, like credit cards, and your total available credit. This is called a credit utilization ratio or a debt-to-credit ratio. 

Credit utilization is applied to all your credit accounts overall, as well as each account individually. The general rule around credit utilization will advise you to keep your utilization ratio under 30% for a good credit score. However, every dollar you sink into your credit will affect your credit score, so try to keep your credit score as low as possible. 

Length of credit history

Credit account age is a surprisingly complex calculation that's tracked in several ways. 

• The credit scoring algorithms look at the actual age of your credit accounts in terms of the average age of your credit accounts, the age of your oldest account, and the age of your newest account. 
• How long specific accounts have been open
• How long since you've last used your accounts

As you accumulate credit cards, you may find yourself one or two while the rest stay in your junk drawer. That activity, or lack thereof, will show up on your credit report. Credit coach Jeanne Kelly says, "while this isn't necessarily a bad thing, if you're trying to maximize your credit score, it's a good idea to rotate your credit cards and consider using accounts that you haven't used in a few years."

Many new accounts lower your average account age, while accounts you've had the longest help your average account age. Only open new credit accounts if needed, and only close old accounts if you have to pay an annual fee.

Mix of credit accounts

Two types of credit get reported to your credit report: revolving credit and installment credit. Revolving credit, like credit cards, returns to you once they're paid off, while installment credit comes in one lump sum that you pay off. The credit scoring algorithm rewards consumers who can balance both types of debt on their credit reports. That means you're best off if you have credit cards and installment loans, like a mortgage or auto loan. More unique types of loans are best for your credit.

However, that doesn't mean you should get a new loan just to help your credit in most cases. Instead, just apply for the credit you need and watch as your score slowly rises over time when you manage your loans well. Your credit mix makes up 10% of your credit score. That said, if you have a few credit cards and no installment loans, looking into a credit builder loan might be worth your time.

New credit

The last main category is the pursuit of new credit. Generally, new credit is bad for your credit score, but only temporarily.

New credit applications lead to hard inquiries on your credit report, slightly hurting your credit score. This negative impact goes down over time and eventually becomes a positive factor. But in the short term, new credit is bad for your credit.

What doesn't affect your credit score?

As we said earlier, your credit score reflects your credit reports. That means that anything excluded from your credit reports has no bearing on your credit score calculations.

Bank accounts

Contrary to popular belief, bank overdrafts don't hurt your credit. In fact, nothing from your checking or savings accounts directly shows up on your credit report or in your credit score. Banks use a different system, known as ChexSystems, to track overdrafts and other banking information. 

Tax liens and civil judgments

Your credit reports contain a public records section which used to document tax liens, civil judgments, and bankruptcies. All three of these could affect your credit score. While bankruptcies are still recorded on your credit reports, the credit bureaus decided in 2018 to remove tax liens and civil judgments from credit reports and credit scoring calculations.

This doesn't mean that a tax lien or civil judgment can't hurt your chances of getting approved for credit. These remain open for public viewing, so a lender could still find those documents when reviewing a credit application.

Utility and phone bills

Your power, water, gas, and phone bills don't generally appear on your credit report. These companies may check your credit when you open a new account, but they typically don't send your payment information to the credit bureaus for credit reporting. That's slowly changing as optional credit-boosting services like Experian Boost start reporting bill payments to the credit bureaus. Experian Boost has also added regular streaming service payments to the list of their reported payments. 

Rent payments

Like your utility and phone bills, your rent payments don't appear on your credit reports by default. However, you can pay a rent reporting service to report your rent to the credit bureaus, which can help you build credit. Unfortunately, many of these services require the cooperation of your landlord in some capacity.

Your income and assets

It doesn't matter to the credit bureaus if you make $1 per year or $1 million per year. Your credit report is all about paying your credit-related bills on time and managing the balances well. Even if you have a ton of money in the bank, you can have a bad credit score if you miss payment due dates. That said, it is easier to keep your credit payments in check with a higher income, and credit scores have been shown to correlate with income level.

Checking credit scores or reports

Checking your credit score and reports does not hurt your credit score. While credit score checks don't show up on your credit reports, requesting your credit report from AnnualCreditReport.com will trigger a soft inquiry on your credit reports. Unlike hard inquiries, soft inquiries do not impact your credit score and are only visible to you. Soft inquiries are also triggered when creditors check your credit to see if you qualify for pre-approved offers, landlords review your rental application, and insurance companies underwrite your policy.

Rate-shopping

If you're buying a new car or home, it's not a bad idea to shop around for the best interest rates. While each application will generate a new inquiry, the credit bureaus typically bundle inquires from a short period of time, between 30-45 days, and treat them as a single inquiry for credit scoring purposes.

FICO 10T and VantageScore 4.0: Trended data

FICO and VantageScore have multiple iterations that vary how heavily certain factors are weighed. The most widely used models are FICO 8 or 9 and VantageScore 3.0.

FICO 10T and VantageScore 4.0 were released in the past few years, FICO 10T in 2020 and VantageScore 4.0 in 2017. However, both models have yet to see wide usage. They use trended data, which considers your account balances within the past 24 months to predict how they will look.

Previously serving as a snapshot of your credit reports, credit scores under FICO 10T and VantageScore 4.0 gain a sense of your momentum as a consumer. If your credit usage has consistently risen over the last few months, your next balance will likely continue that trend.

Credit score calculations frequently asked questions (FAQ)

How accurate is FICO?

The goal of any credit scoring model is to give lenders a cursory glance into a consumer's risk level as a borrower. As the leading credit scoring model in the industry, FICO 8 and 9 are very good at predicting how a borrower will repay their debts. With the eventual wide rollout of FICO 10T, the margin for error gets even slimmer.

How accurate is VantageScore?

VantageScore is accurate in that it is very good at telling lenders how risky a potential borrower is as a customer. According to VantageScore's most recent available data, 0.1% of consumers with a VantageScore credit score above 801 entered serious delinquency, meaning they were over 90 days late on a payment. Meanwhile, 30% of borrowers with a credit score of 300-500 entered serious delinquency.

Is a 700 credit score good?

A 700 credit score is categorized differently based on which credit scoring algorithm you're looking at. Under VantageScore, a 700 is considered good, while a 700 FICO score is considered fair.