Credit scores are such an important part of people's financial lives, it's only natural to wonder: Just how is my credit score calculated?

The credit score often referred to as a FICO score is a proprietary tool created by FICO, the data analytics company formerly known as the Fair Isaac Corporation. FICO is not the only type of credit score available, but it is one of the most common measurements used by lenders to determine the risk involved in doing business with a borrower. Here's a look at what FICO examines to come up with its credit scores.

Key Takeaways

  • A history of timely payments matters most.
  • The amount you owe is a big factor.
  • Having unused credit makes you look good.
  • Applying for new credit can lower your score.

How Is a FICO Credit Score Calculated?

What exactly does a credit score measure? FICO does not reveal its proprietary credit score calculator formula, but it is known that the calculation incorporates five major components, with varying levels of importance. These categories, with their relative weights, are:

  • Payment history (35%)
  • Amount owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

All of these categories are taken into account in your overall score, which can range from 300 to 850. No one factor or incident determines it completely.

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3 Important Credit Score Factors

How Each Category Factors In

Payment history

The category of payment history takes into account whether you have paid your credit accounts consistently and on time. It also factors in previous bankruptcies, collections, and delinquencies. It takes into consideration the size of these problems, the time it took to resolve them, and how long it has been since the problems appeared. The more payment issues you have in your credit history, the lower your credit score will be.

Amount owed

The next largest component is the amount you currently owe relative to the credit you have available. Credit score formulas assume that borrowers who continually spend up to or above their credit limit are potential risks. Lenders typically like to see credit utilization ratios—the percentage of available credit that you actually use—below 30%.

While this component of the credit score focuses on your current amount of debt, it also looks at the number of different accounts that you have open and the specific types of accounts you hold. A large total amount of debt from many sources will have an adverse effect on your score.

Your credit score is only one factor a lender will consider, but it’s a big one.

Length of credit history

The longer your credit accounts have been open and in good standing, the better. Common sense dictates that someone who has never been late with a payment in 20 years is a safer bet than someone who has been on time for two years.

New credit

Also, when people apply for credit frequently, it probably indicates financial pressures, so every time you apply for credit, your score gets dinged a little. Before opening a new credit account, it’s smart to consider whether having that extra credit is worth the drop in your credit score.

Credit mix

Lenders like to see a healthy credit mix that shows that you can successfully manage different types of credit. Revolving credit (credit cards, retail store cards, gas station cards, lines of credit) and installment credit (mortgages, auto loans, student loans) should both be represented, if possible.

What Isn’t Included

It is important to understand that your credit score reflects only the information contained in your credit report. Your lender may consider other information in its appraisal. Your credit report doesn't show, for example, your age, current income, or length of employment.

However, your credit score is a key tool used by lending agencies. It is important that you keep an eye on your credit report. That is the basis of your credit score, so reviewing it at least once a year and correcting any errors on it is crucial. Additionally, if you find that your credit score is low and you need assistance in removing any negative marks, there are credit repair companies that might be able to help.