Financial Resource Center: Visit our financial resource center for information to help support you through the unexpected

How Is My Credit Score Calculated?

by | Feb 28, 2020

Having the right tools to build up your credit score is vital to maintaining a healthy credit profile. But what if you don’t understand how your credit score is made up?

Your credit score is calculated through a few different factors, and how it’s made varies based on different scoring systems. There’s FICO and VantageScore — two of the most popular scoring items. While they aren’t the same methods, they do have a lot in common on how their scores are calculated, including:

  • Your payment history
  • Your credit utilization 
  • The length of your payment history
  • The type of credit accounts you have
  • New credit

How much each factor matters is based on different scoring models. But here’s a general idea of the importance of each credit score element.

Payment history

Your payment history is the biggest determining factor in how your credit score is calculated. For FICO scores, it makes up 35%.

The reason why payment history is so important is because it shows lenders how responsible you are with paying back your debt on time. The more on-time payments you make, the higher your scores goes. 

It also works the other way. The more missed payments you have, the lower your score drops. If you have many lapsed payments, and anything that has gone into collections or default, your score will negatively reflect that.

Payment history includes your payments for credit cards, student loans, and any other type of loan or revolving credit. It also includes bankruptcies, foreclosures and anything that has been sent to collection agencies.

Credit utilization

Your credit utilization, or the amounts you owe, make up 30% of your score. This is the amount of credit you owe verses the amount of credit you have available to you. The lower your credit utilization, the lower risk you are to lenders. 

The higher your credit utilization, the more risky you are to lenders. Banks see high credit utilization as risky because you’re spending more than you’re paying back. 

The length of your credit history 

The longer you’ve had established credit, the more responsible you look to lenders. The length of your credit history makes up 15% of your score. 

While you may expect that the older you are, the longer your credit history is, but that’s not exactly true. If you take out student loans when you’re 18, you’re establishing your credit early on. The same goes for opening a credit card account in high school, even if you have a parent as a cosigner. Having your name on a credit card or loan early on can help you start your credit history early. 

You may think about putting off getting a credit card until you’re older, but you may want to get one as soon as you’re able to afford it. Making on-time regular payments every month can help you establish credit not only in responsible payments but also starting your credit history sooner rather than later.

Type of accounts

The type of credit accounts you have, or your credit mix, matters to credit bureaus. Having a variety of different credit accounts makes you more valuable. It means you can handle various types of credit while still being able to pay your balances on time every month. Types of accounts can include:

Having a variety of different accounts appeals to creditors, so try to have a few different accounts under your name.

New credit

While new credit only makes up 10% of your overall score, it’s both a blessing and a curse.

New credit is good for helping build up your score by expanding the type of accounts you have and growing your available credit. But try not to have too much of a new thing. 

Applying for new credit can cause hard inquiries to your credit report, which can temporarily cause your score to drop. While it will recover in a few months, it also changes how your score is calculated. The average length of your credit age, or the average age of your open accounts. 

Having a low average age of your open accounts isn’t terrible, but if you’re applying for new credit, like a mortgage, it may hurt your chances of getting the best-possible interest rate. Try applying for new credit when you need it, rather than when you feel like it. Also try to keep your new credit applications low, less than two is ideal.

Bottom line

While credit score calculations are slightly different depending on which company is doing the scoring, they’ve got the basic principles in mind. On-time payment history is going to be the biggest factor in calculating your score. Then how much credit you use. Followed by the length of your credit history, the types of credit you have and new credit you’ve started.

Latest Articles

The Ultimate Guide To FHA Streamline Refinance
The Ultimate Guide To FHA Streamline Refinance

If you're looking to refinance your existing FHA loan, then you may want to consider an FHA Streamline. The FHA Streamline Refinance program helps borrowers refinance their current FHA loan more quickly and at a lower rate. It'll also save you from having to fill out...

How the LESA Can Benefit Reverse Mortgage Clients
How the LESA Can Benefit Reverse Mortgage Clients

A Life Expectancy Set Aside, or LESA, is a government-implemented guideline that requires some reverse mortgage borrowers to put aside a portion of their reverse mortgage proceeds to pay for their property taxes and homeowners insurance for a certain amount of time....

Can I Prepay My Reverse Mortgage?
Can I Prepay My Reverse Mortgage?

Most seniors who receive a Home Equity Conversion Mortgage (HECM) intend to make payments only when the loan comes due. After all, one of the primary benefits of a HECM (more commonly referred to as a reverse mortgage) is that you don’t need to start making payments...

What to Do After Closing a Reverse Mortgage
What to Do After Closing a Reverse Mortgage

One of the stipulations in a reverse mortgage agreement is that the borrower is responsible for home upkeep, and to maintain the home at acceptable levels. To ensure this obligation is met, lenders do an initial inspection before the loan is signed to establish that...

Making Monthly Payments on a Reverse Mortgage
Making Monthly Payments on a Reverse Mortgage

The reverse mortgage has plenty of perks that distinguish it from an ordinary loan. While many borrowers appreciate the fact that it is a non-recourse loan that does not require monthly payments, some borrowers still choose to make monthly contributions. Whatever they...

How Reverse Mortgages Affect Medicaid and Medicare
How Reverse Mortgages Affect Medicaid and Medicare

Because a reverse mortgage allows you access to home equity, your income can improve dramatically. Increased income, however, can have an impact on government sponsored programs, specifically Medicaid and Medicare. First the good news–taking out a reverse mortgage...

Pin It on Pinterest