How Credit Scores Are Calculated

Credit scores have a big impact on your ability to rent an apartment, qualify for a mortgage or even buy a car. Yet many people don’t fully understand how they are calculated and what steps they can take to improve them.


Keeping balances low on credit cards, maintaining an old credit history and checking your score regularly are all important for a good credit score. But what makes up a credit score?

Payment History

The payment history factor, which accounts for 35% of FICO and VantageScore credit scores, considers how timely you have been with your payments on credit cards, mortgages and other debt. It also looks at the types of credit you have, how long you’ve had credit and whether you’ve had derogatory marks on your report like late payments or accounts that went to collections.

Lenders want to know that you’ve paid back money you borrowed in the past, so they’ll feel more comfortable doing business with you and lending you money if your payment history is strong. A record of on-time payments is far more powerful than a single missed payment or derogatory mark that can linger on your report for up to seven years.

Amounts owed or credit utilization is another important scoring factor that measures how deep in debt you are by looking at your balance compared to your total credit limit on revolving accounts (like credit cards). People with excellent credit scores typically have a low credit utilization rate, so keeping balances low and not maxing out your card can improve your score. A credit utilization rate higher than 30% is generally considered high. Credit mix, which takes into account whether you have installment accounts (like auto loans and personal loans) and revolving accounts, is another factor that can help your scores.

Amounts Owed

The amount of debt you carry makes up a significant percentage of your credit score. Specifically, lenders want to see that you can responsibly manage debt over a long repayment tenor. Lenders also take into account the percentage of your available credit you use — known as your credit utilization ratio. A high utilization rate can signal that you’re overextended and could have problems paying back debt.

Amounts owed can also be impacted by the type of credit you have, as well as your mix of installment and revolving accounts. For example, if you pay down an installment loan and leave only a small balance on your credit card, this can affect your credit score negatively because it leaves a gap in your credit history. Amounts owed is also impacted by any collection accounts on your report, which can have a negative impact on your credit score if they are not paid off.

Amounts owed can also be influenced by big financial slip-ups, such as criminal arrests and bankruptcies. These can have a long-lasting negative impact on your credit scores and may make it harder for you to qualify for new credit. Living within your means and only borrowing what you can afford to repay is one of the best ways to improve your credit scores and lower your cost of financing.

Length of Credit History

Length of credit history is one of the factors that make up your credit score. It accounts for about 15% of your overall score. In general, the longer your credit history is, the higher your credit score will be. This is because lenders look at your past behavior to help predict how you’ll handle future debts, so they can determine whether you’re a responsible borrower.

Credit scoring models measure your length of credit history by calculating the average age of all your open credit accounts. To do this, they add up the ages of all your open credit accounts and divide that number by the total number of open credit accounts. For example, if you have three credit cards with a credit score of 620 and each card has a different age, a credit scoring model will calculate that your average account age is 620 / 3 = 128 months (a little over ten years).

It’s important to keep in mind that while a long credit history does positively impact your credit scores, it won’t completely offset poor credit behaviors or an elevated utilization ratio. So, it’s important to maintain old credit accounts and limit the number of new ones you open, as this can cause your average account age to decline. That’s why it’s a good idea to wait at least a year before opening a new credit card or loan.

New Credit

Credit scoring models look at how much new credit is added to your report as well as the types of accounts that have been opened. Credit cards and loans account for 30% of your credit score and the amount you owe compared to what is available to you (credit utilization) makes up another 15% of your score. High balances and maxed-out credit cards may lower your scores, but small balances that are paid on time can improve them.

If you apply for multiple credit cards or loans, each application will generate a hard inquiry (or pull) of your credit report and this can impact your credit score in the short term. However, if you rate shop for a loan (car, mortgage, etc.) within a 14-day period, all inquiries made by lenders for that type of loan will count as just one hard hit.

Opening a new account will increase your credit utilization and credit mix, which can improve your scores over time. But applying for too many lines of credit can signal to lenders that you’re in financial trouble or about to be and this can cause your scores to decline. The good news is that this effect wears off quickly. Soft inquiries—those that appear only on your own reports, as well as those from employers and landlords with your permission, insurance companies requesting your report and preapproved credit offers—do not affect your scores.