Credit scores sound simple—it’s just a three-digit number, right? But understanding how credit scores are calculated can be a complex undertaking. Don’t worry. We’re here to break down the complexities and help you understand how these numbers are calculated and how they affect you.
To start, here are the five factors that go into calculating your credit score:
- Payment history: The record that demonstrates whether or not you make timely payments on your account. It accounts for 35% of your credit score.
- Credit utilization: The percentage of your available credit you have used. A lower ratio is better. This accounts for 30% of your credit score.
- Age of credit: How long you’ve had credit and how old your accounts are. It accounts for 15% of your credit score.
- Types of accounts: The diversity of your credit mix. This accounts for 10% of your credit score.
- Application history: How many times you have applied for various forms of credit in the past two years. This accounts for the last 10% of your credit score.
Ultimately, the credit bureaus take all the information from these five categories and use complicated algorithms to arrive at your final credit scores. The specifics of that math are held close by the various credit bureaus and vary depending on the type of score being requested. But you can still improve and manage your credit by understanding more about these five factors.
〉 Sign up for our free Credit Report Card to see where you stand on the five major factors.
1. Payment History
Your payment history is the biggest factor for your credit scores—it drives 35% of your score. Payment history is the record on your credit report of whether you pay your bills on time.
Payment history appears on your credit reports from the three major U.S. credit reporting agencies—TransUnion, Equifax and Experian. The history that’s considered comes from your credit card payments, installment loans—such as a car payment—finance company accounts and mortgages. While all three reporting bureaus gather information about your payment history, not all creditors send all information to all three bureaus. For this reason, the information on your reports may be different between the bureaus.
The reason this aspect of your score carries such a big weight is that it best reflects whether you’re a risk in the eyes of lenders. If you’ve missed a payment here or there, it will have a negative impact. However, that impact fades with time as long as you don’t make any other late payments in the meantime. And if you have a pristine repayment history, congratulations—but don’t necessarily expect perfect scores, as there are still four other factors to consider.
Negative items that could lower your score: Late or missed payments, accounts that go to collections, liens, foreclosures, bankruptcy and judgments.
2. Debt Usage, or Credit Utilization
The amount of debt you carry is the second largest influencer and accounts for roughly 30% of your score. There are several types of debt that show up on your credit report, but credit utilization refers specifically to revolving debts. Revolving debts—like credit cards and home equity lines of credit—have a predetermined credit line but no set monthly payment.
Having a small amount of debt won’t damage your score, but you don’t want to max out credit cards if you’re trying to improve your credit. The general rule is to keep the amount of debt you owe below at least 30%—and ideally 10%—of your available credit line. Make sure you know how much debt is too much debt and how you can reduce your debt if necessary.
Keep in mind that this ratio is determined based off of the balances reported to the credit bureaus, which are often your statement balances. This confuses many people who pay their credit cards in full every month—their credit report shows a balance, but they know they’re paid in full.
The amount that’s reported to the credit bureau, and not the balance you’re actually paying interest charges on, is what matters for your credit utilization. Some people opt to pay off their credit cards before the statement balance is created to show a $0 statement balance and a low utilization. Credit reports aren’t updated in real time, so it can sometimes take up to 60 days for updated information to show up on your credit reports.
Debt that could lower your score: credit cards, retail store cards, home equity lines of credit and overdraft protection for checking accounts.
3. The Age of Your Credit
This aspect of your credit scores considers the age of your accounts, not your personal age. How long you’ve managed credit is a factor you have little control over because time is the biggest influencer here.
This factor accounts for roughly 15% of your credit score and looks at the track record of how long you’ve had various credit accounts and how you’ve managed them during that time. The longer you’ve had credit, the better. To keep your age of credit healthy, don’t close your longest-held accounts unless absolutely necessary.
Factors that can cause a lower credit score: Recently opened accounts that don’t have a track record, no credit history or very little history.
4. Types of Accounts
The different types of accounts appearing on your credit history, also called your credit mix, make up about 10% of your credit score. There’s no ideal version of a credit mix, as what’s right for you might not work as well with someone else’s credit profile. It isn’t essential to have an account of every possible type, either. But it is a good idea to have a variety to show you can responsibly manage different types of debts.
Factors that could lower your score: Having only one type of credit account like credit cards in your credit history.
5. Your History of Applying for Credit
The number of credit inquiries appearing on your history makes up about 10% of your credit score. Basically, this is tracking whenever your credit reports are pulled. That means every time your consumer credit file is reviewed for a new credit card or loan application, it’s documented. This tells lenders how actively you’re shopping for credit and how frequently.
There are two general categories of inquiries that can appear on your profile—hard inquiries and soft inquiries.
Hard inquiries appear when you apply for some form of credit from a lender. This includes, but isn’t limited to, car loans, student loans, mortgages and new credit cards. These inquiries stay on your credit report for two years but only have a negative impact for the first year. They can be seen by lenders or anyone who pulls your reports.
Soft inquiries occur when your individual credit is pulled for a reason other than determining your eligibility after a credit application.
What are some reasons for a soft inquiry?
- You ask for a copy of your own credit report.
- A company does a promotional review to send you information about a credit card pre-approval.
- A potential employer views a version of your credit reports as part of a job application process.
- A lender you have credit with reviews your reports.
Soft inquiries only stay on your report for 24 months and don’t appear to anyone who reviews them other than you. They also don’t impact your score.
Other Factors That Affect Your Credit
Beyond those five factors, a few other things can affect your credit score.
Rent and Utility Payments
Usually, your rent or utility payments will only show up on credit reports when it has already gone bad. It’s often in the form of a judgment or a collection if you owe money. Experian RentBureau, another division of Experian, lets landlords and property managers report rental history to help renters build credit. Experian Boost and UltraFICO do the same for utility bills and other bank account transactions.
While taxes themselves don’t affect your credit score, the way you decide to pay them—and paying late—can affect your credit. You can keep taxes from derailing your credit by paying them on time or negotiating an installment agreement with the IRS.
Average Credit Score Ranges
Credit scores are typically rated from “bad” to “excellent.” It’s important to understand where you fall on this list so you can take the proper steps to rebuild or fix any credit issues and secure a better financial future.
Most standard credit scoring models range from 300 to 850. The average FICO score is around 703. FICO is one formulation used by the credit bureaus to create a score. According to Experian, 700 is considered to be a good score. Below 500 is considered a bad score.
How Your Credit Score Affects You
A poor credit score or the lack of credit history can make it difficult to obtain a line of credit or a low interest rate on a loan. While you may still be able to get some form of credit—even with a credit score in the 500s—you will likely face abnormally high interest rates and other conditions because of the elevated risk of lending to someone with such a low credit score.
If you’re finding these challenges to be more than just an inconvenience, take a closer look at your credit reports and scores to see where you may need to put a little work in to improve. If there are errors on your credit report dragging your score down, you may want to work with a credit repair company to fix your credit report.
Improve Your Credit Score
To start building your credit or improving your score, be sure to get your free credit report and go through each detail on the report. Look for mistakes or inaccuracies that can be corrected to help improve your score. Then, start making a list of actions you can take to improve factors such as your credit utilization or mix.
If you’re not sure where to start, sign up for a free credit report card from Credit.com This easy-to-use resource analyzes your credit report and gives you a brief breakdown of each of the five credit factors and where you stand with each. It can help you figure out where any weak links in your credit profile may be so you can do the work to strengthen them.