Understanding Credit Scores: How Are Credit Scores Calculated?

Learn about the 5 factors that affect your credit score

The more you know about how your credit score is calculated, the easier it becomes to improve your score and build good credit. A higher credit score means that your credit applications are more likely to be approved, and with more favorable interest rates. In some states, credit scores can influence how prospective employers evaluate job applications, how insurance companies assess risk, and how landlords approve rental applications.

Many mortgage companies and lending institutions rely on the FICO® Score as a fast and reliable way to determine your credit worthiness. All three major credit reporting bureaus (Equifax, Experian, TransUnion) use the FICO® Score model to calculate your score, but there can be slight variations in the scores between each bureau due to slight differences in the information contained in each credit report — a common occurrence.This is why you should occasionally check your credit report with each of the major bureaus and investigate any large differences in your scores.  Small differences in scores, pulled at different times, are considered normal.

When you understand the basic formula, you can take simple steps that will ultimately result in a higher credit score, often within six-to-eight months. FICO® Credit Scores are calculated from information readily available on your credit report. The formula relies on five categories of credit data that varies in importance for different credit profiles1.  The percentages below are based on the five categories for the general population.

  • 35% Payment History
  • 30% Amount Owed
  • 15% Length of Credit History
  • 10% New Credit
  • 10% Types of Credit in Use
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Payment History

is typically the most significant part of your FICO® Credit Score because it shows lenders your track record for making payments on time and whether you’ve missed any payments. Paying your installment loans and credit cards on time is one of the best ways you can improve your score. Take advantage of the automatic bill pay feature lenders offer to help you avoid late payments. Many banks charge a fee for this service, but some companies such as Discover provide this as a free benefit to card members.

Amount Owed

is the ratio of your total available credit to the amount of credit used. Lenders will assume you are a higher credit risk if your revolving debt is high. Paying down credit card balances will earn you a higher FICO® Credit Score, all else being equal. A good rule of thumb is to keep your credit card balances as low as possible.

Length of Credit History

considers your oldest account, but also the average age of all of your accounts. For this reason, you should avoid opening too many new accounts at once, especially if you have a short credit history.

New Credit

is measured not only by the number of new credit accounts you have opened, but also the number of credit report inquiries that are generated when you request a line of credit. The good news is that unsolicited “preapproved” offers are considered “soft inquiries” and do not negatively impact your FICO® Credit Score. However, if you apply, the lender will make a hard inquiry on your bureau file. Knowing this can help you decide whether you should consider an attractive low-interest offer on a new credit card.

Types of Credit in Use

considers the mix of credit you use. Your score is improved by having a history of managing different kinds of credit, such as a mortgage, installment loans, and revolving lines of credit. 

Now that you understand the score, the first step to achieving a better one is to obtain copies of your credit report from each of the major bureaus to help you learn what makes up your score. There is only one federally directed site: www.annualcreditreport.com. You are entitled to one free copy a year, after which a small fee applies for additional requests.

Check out more tips for managing your score.



Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.

FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries.

Discover Financial Services and Fair Isaac are not credit repair organizations as defined under federal or state law, including the Credit Repair Organizations Act. Discover Financial Services and Fair Isaac do not provide “credit repair” services or assistance regarding “rebuilding” or “improving” your credit record, credit history or credit rating. 

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