How is a Credit Score Calculated?

Most people, who know anything about personal finance, understand why a credit score is important. Far fewer people, however, know exactly what goes into determining a credit score. For the FICO score model, which the large majority of credit scores are based on, it’s best viewed as a pie chart of different categories. However different lenders use different models, resulting in different scores. It's also important to check all three bureaus since different lenders report your payments differently.

Consider these categories as ingredients in a recipe, which a consumer can use to cook up their credit score. The better you get at perfecting the recipe, the better your credit score will be over time. However, if you’re missing ingredients or do not execute the recipe as instructed, your score can drop. 

So what are these ingredients and how critical are each to the recipe? Here’s a breakdown of what goes into a FICO credit score, ranked by most important to least important. 

The most important factor in determining a credit score is payment history, which accounts for 35% of FICO’s calculation. It sounds simple enough, but paying your bills on time (and in full) has a big impact on your score, as it indicates to creditors and credit bureaus that you are a responsible consumer. Being past due on payments, whether it’s by 30 days or 90 days, can have a negative effect on a credit score as it indicates a higher risk of defaulting. For people having trouble staying on top of their balance, setting up auto pay or due date alerts are two options for making sure your accounts are in good standing. 

When it comes to evaluating the total debt (or unpaid balance) on a credit card, it’s all relative to the credit limit on the account. This is referred to as the credit utilization ratio, which makes up 30% of your credit score. A consumer, whether they have one credit card or more, should strive for a low credit utilization ratio (under 30%), as a high percentage can indicate someone who is too dependent on credit. Cardholders who limit their spending and consistently pay their statement balance in full tend to be in good shape, while those who overspend and only pay the minimum amount likely possess a high credit utilization ratio on a month-to-month basis. 

The length of a consumer’s credit history makes up 15% of a credit score, and can work to their advantage or against them. It’s pretty simple — the longer history of good credit you have, the better it is for your credit score. If you have bad credit over a long period of time, your score will suffer. For those who don’t have a long credit history, it’s still possible to attain a healthy FICO score as long as you grade high marks in the other categories on this list. 

Variety is the spice of life. It can also help your credit score, as long as payments are made timely and debts don’t pile up. A consumer successfully managing multiple different credit accounts (e.g., credit card, personal loan, mortgage, retail accounts) stands to improve their credit score. However, it is by no means required to have every account listed above if you don’t need them. Credit mix makes up 10% of a credit score.

Finally, new credit is the last ingredient in the credit score recipe. Like credit mix, it accounts for 10% of your score and is not nearly as important as payment history or keeping a low credit utilization ratio. Still, consumers should avoid applying for too many new accounts (inquiries in the past year, according to FICO) at once. Applying for a new account results in a hard inquiry to your credit report, which can lower your score when done too frequently. 

Credit scores are constantly changing, as even FICO is reshaping its model to get a more accurate picture of credit activity and history. Still, adhering to good personal finance practices, like paying bills on time and not overspending, will always help consumers in the long run looking to boost their score.

Fiona matches people with card offers from all over the credit spectrum. Whether you’re looking for a new card to diversify your credit mix or just build credit up in general—we’ve got you covered.