How is a credit score calculated?

Calculating your credit score is a complex process that involves multiple factors and mathematical models. While the exact algorithms used by credit scoring companies like FICO and VantageScore are proprietary, they provide a general framework for understanding how your credit score is calculated. Here's a simplified overview of the key components that go into calculating your credit score:

1. Payment History (35% of FICO Score):

   • This is the most significant factor in your credit score. It reflects whether you've paid your bills on time. Late payments, collections, and charge-offs have a negative impact. Consistently making on-time payments improves your score.

2. Credit Utilization (30% of FICO Score):

   • Credit utilization is the ratio of your credit card balances to your credit limits. High utilization can indicate financial stress and negatively affect your score. Keeping credit card balances low relative to your credit limits is essential for a good score.

3. Length of Credit History (15% of FICO Score):

   • This factor considers the age of your credit accounts, including the age of your oldest account, the average age of your accounts, and the age of your newest account. Longer credit histories tend to have a positive impact.

4. Types of Credit (10% of FICO Score):

   • Lenders like to see a mix of different types of credit accounts, such as credit cards, installment loans (like auto loans or mortgages), and retail accounts. A diverse credit mix can have a positive effect on your score.

5. New Credit (10% of FICO Score):

   • Opening multiple new credit accounts in a short period can be seen as risky behavior and negatively impact your score. Each credit inquiry can also slightly lower your score, so avoid applying for credit excessively.

6. Public Records and Derogatory Information:

   • This includes information such as bankruptcies, tax liens, and judgments. These items can have a significant negative impact on your credit score.

7. Recent Credit Behavior:

   • Recent credit activity, including recent late payments or new credit inquiries, can have a more substantial impact on your score than older credit events.

To calculate your credit score, credit scoring models assign weights to these factors based on their importance. For example, FICO gives a higher weight to payment history and credit utilization, while VantageScore may have a slightly different weighting.

It's important to note that various versions of credit scoring models exist. For example, FICO periodically updates its scoring models (e.g., FICO Score 8, FICO Score 9) to better reflect consumers' credit behavior. Each version may have a slightly different formula, but the core components mentioned above generally remain consistent.

Additionally, lenders may use specific versions of these models tailored to their industry. For instance, mortgage lenders may use a version of the FICO score optimized for mortgage lending.

It's also worth noting that credit scores can vary slightly between the three major credit bureaus (Equifax, Experian, and TransUnion) due to differences in the data they collect and the scoring models they use.

To maintain and improve your credit score, focus on responsible credit behavior, such as paying bills on time, keeping credit card balances low, and avoiding excessive new credit applications. Monitoring your credit reports regularly for errors and signs of identity theft is also essential.