How Is My Credit Score Calculated?

Updated on June 28, 2019

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If you want to ensure your credit score helps you reach your financial goals instead of holding you back, you’ll want to get whyze and understand exactly how it’s calculated.

Because of its popularity with top lenders in the U.S., your credit score will primarily be calculated as a FICO score. FICO scores generally range from 300 to 850 with 850 being the best possible score. Higher scores mean you are a trustworthy borrower and will lead to you getting approved for more loans with lower interest rates. This will save you a large amount of money over time. So, how exactly is your FICO score calculated?

The Formula

Your FICO score is calculated based on your personal credit data at the three main U.S. Credit Bureaus: Equifax, Experian, and TransUnion. Since each credit bureau has unique data about your credit history, you will have a FICO score from each.

Regardless of where your FICO score comes from, it will generally be calculated based on five different categories:

  • Payment History
  • Amounts Owed
  • Length Of Credit History
  • New Credit
  • Credit Mix

While the exact formula to your FICO score will vary depending on what stage of life you are in, it will typically follow these guidelines:

  • Payment History - 35%
  • Amounts Owed - 30%
  • Length Of Credit History - 15%
  • New Credit - 10%
  • Credit Mix - 10%

In order to master your credit score, let’s get whyze and take a closer look at what each category includes.

Payment History (35%)

Accounting for 35% of your FICO score, the most important category is Payment History. Payment history lets a lender know how likely you are to make payments on time after you borrow money. Payments on credit cards and installment loans like auto loans, mortgages, and personal loans are considered in this category. In order to receive a high credit score, you’ll want to make sure you pay these on time! While a few late payments won’t automatically send your credit score to 300, it will most likely lower it.

If you happen to make a late payment or miss a payment altogether, your FICO score will drop according to how late you are, how much you owe, how recent the late or missed payment was, and how many missed or late payments you have had in the past. Generally, your most recent late or missed payments with large amounts affect your FICO score the most. Situations like bankruptcies, lawsuits, and any type of wage garnishment will also lower your score.

Amounts Owed (30%)

The second most important category is Amounts Owed. Determining 30% of your FICO score, this category mainly focuses on your credit utilization. In a nutshell, credit utilization shows how much of your available credit you are using.

As an example, if you have two credit cards with each card having a $5,000 limit, your total available credit is $10,000. If you charge $1,000 to one of your cards, you now have a credit utilization of 10%. Having a high credit utilization will negatively affect your credit score, so you’ll want to keep it as low as you can.

While credit utilization will only include credit cards and other lines of credit, installment loans such as mortgages, auto loans, and student loans will be factored in the amounts owed category as well. For example, if you borrowed $20,000 to buy a car and you have paid back $2,000 so far, you still owe 90% of the original loan. As you pay down this loan, your amounts owed category will look better and better.

Amounts owed also takes into consideration how many of your accounts have balances on them. Too many accounts with balances on them will hurt your credit score, so you’ll want to minimize this when you can!

Length Of Credit History (15%)

Next in importance is the length of your credit history. Contributing to 15% of your credit score, this category is pretty straight forward. The longer you have credit, the better! Specifically, your FICO score will measure the length of your credit history in three ways:

  • The age of your oldest account.
  • The age of your newest account.
  • The average age of all your accounts.

This is why you should think twice about closing that old credit card you don’t use anymore!

New Credit (10%)

The remaining 20% of your credit score is split between New Credit and Credit Mix. At 10% of your FICO score, new credit is all about inquiries and opening new accounts. An inquiry is when a lender makes a request to see your credit report or score. Only inquiries made by companies that you have applied for a loan or credit within the last 12 months will count towards your FICO score.

If you have too many inquiries or open several new credit accounts in a short period of time, your FICO score may go down. This is because lenders see this type of activity as a representation of a risky borrower.

Credit Mix (10%)

The last 10% of your FICO score is determined by your Credit Mix. Because lenders want to be sure you can manage different types of credit, your FICO score will consider how many installment loans and revolving credit accounts you have. This will include accounts like:

  • Credit Cards
  • Auto Loans
  • Mortgages
  • Student Loans
  • Personal Loans

While credit mix doesn’t affect your FICO scores by a large amount, you’ll want to make sure you have a diverse credit mix that you are managing responsibly.

Takeaway

To ensure your credit scores help you reach your financial goals instead of holding you back, keep in mind how they are calculated. While your FICO scores are calculated based on five different categories, some categories are more important than others. Accounting for 65% of a FICO Score, Payment History and Amounts Owed make up the majority of your scores. Be whyze by keeping this in mind!