A credit score is a three-digit number that helps financial institutions evaluate your credit history and estimate the risk of extending credit or lending money to you. Credit scores are based on information collected by the three major credit bureaus, Equifax, Experian, and TransUnion. The most common credit score is the FICO score, named for the company that devised it, Fair Isaac Corporation.

Your credit score can be a deciding factor in whether or not you qualify for a loan and, if you do, the interest rate you'll pay on it. It may also be used in setting your insurance rates and even be consulted by prospective employers and landlords. This article will explain how your FICO score is calculated, what information is not considered, and some common things that can lower your credit score or raise it.

Key Takeaways

  • Your credit score is calculated based on five major factors, including your payment history and the amounts you owe.
  • A problem in any of those areas can cause your score to fall.
  • You can also raise your credit score by taking positive steps, such as paying bills on time and lowering your debt load.

How Is a FICO Score Calculated?

Your FICO score is based on five major factors listed here in order of weighting:

  • 35%: payment history
  • 30%: amounts owed
  • 15%: length of credit history
  • 10%: new credit and recently opened accounts
  • 10%: types of credit in use

What's Not Included in a FICO Score?

While FICO considers a variety of factors in determining your score, it ignores certain other information, including:

  • Race, color, religion, national origin, gender, or marital status
  • Age
  • Salary, occupation, title, employer, date employed, or employment history
  • Place of residence
  • Interest rates on your current credit cards or other accounts
  • Child support or alimony
  • Certain types of inquiries, including consumer-initiated inquiries, promotional inquiries from lenders without your knowledge, and employment inquires
  • Whether you have obtained credit counseling

Note that while FICO is the most widely used credit score, it is not the only one, and other scoring companies may take some of those listed factors into account.

What Can Lower a Credit Score?

A misstep in any of the five scoring factors listed under "How Is a FICO Score Calculated?" can have a negative effect on your credit score. Here are examples.

Late or missed payments

Fully 35% of your FICO score is based on your payment history, including information on specific accounts (credit cards, retail accounts, installment loans, mortgage, etc.); certain adverse public records (such as liens, foreclosures, and bankruptcies); the number of past due items on file, and how long those accounts are past due.

Too much credit in use

Another 30% of the FICO score is based on the amount you owe as a percentage of the credit you have available to you, such as the limits on your credit cards. Having too high a percentage (such as more than 30%) may mean that you are overextended and could have trouble repaying your debts in the future. This is often referred to as your credit utilization ratio.

A short credit history, or none at all

Even though age is not considered in the FICO score, the length of your credit history is. A young person will typically have a lower credit score than an older one, even when all other factors are the same. Another 15% of your FICO score is based on the length of your credit history, including the amount of time since the various accounts were opened and used.

Too many requests for new lines of credit

As mentioned above, your FICO score does not take into consideration any consumer-initiated or promotional inquires into your credit record. That means you can check your own credit score without risk of damaging it and that companies that make inquiries before sending you promotional notices (such as pre-approved credit card solicitations) will not affect your score, either. The 10% of your FICO score that is based on new credit includes the number of recently opened accounts (and the percentage of new accounts compared with the total number of accounts), the number of recent credit inquiries (other than consumer and promotional inquiries), and how long it's been since new accounts were opened or credit inquiries were made.

Too few types of credit

The remaining 10% of your FICO score is based on the types of credit you use, such as credit cards, a mortgage, an auto loan, and so forth. Having only one type of credit—just credit cards, for example—can have a negative impact on your score. Having a variety of credit types improves your score because it marks you as an experienced borrower.

If remembering to pay bills on time is a problem for you, consider setting up automatic payments or subscribing to reminders via email or text.

What Can Raise a Credit Score?

As FICO notes, improving a poor credit score is a gradual process. There are no quick fixes—and beware of any person or company that tries to sell you one. FICO's basic advice for rebuilding credit is to "manage it responsibly over time." Here are some of the steps you can take:

  • Check your credit report to identify problem areas
  • Set up automatic payments or payment reminders so that you pay bills on time
  • Reduce your overall level of debt
  • Pay off debt rather than move it around, such as from one credit card to another
  • Keep your credit card and revolving credit balances low
  • Apply for and open new credit accounts only if necessary