A credit score is a numeric expression that helps lenders evaluate a person's credit report and estimate the risk of extending credit or loaning money to people. A person's credit score is provided to lenders by the three major credit reporting agencies, including Equifax, Experian and TransUnion. The most common credit score is the FICO score, named after software developer Fair Isaac and Corporation.

Since a person's credit score affects his or her ability to qualify for different credit types and varying interest rates, it is in a person's best interest to achieve the highest credit score possible. Understanding the factors that can negatively affect a credit score can help people work towards a more favorable score. This article will introduce how a FICO score is calculated, what factors are not included in a FICO score, and the common things that lower a person's credit score.

How is the FICO Score Calculated?It is helpful to understand what factors are considered when determining a person's credit score. A FICO score is based on five factors:

  • 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 Factors Are Not Included in the FICO Credit Score? While FICO scores do consider a variety of factors, certain information is not used (other types of scores may consider some of these factors, such as age and employment history):

  • 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 credit cards or other accounts
  • Child support or alimony
  • Certain types of inquiries, including consumer-initiated, promotional inquiries from lenders without your knowledge and employment inquires
  • Whether you have obtained credit counseling

What Lowers a Credit Score?
Late or Missed Payments
35% of the FICO score is based on payment history, including information on specific account types (credit cards, retail accounts, installment loans, mortgage, etc); the presence of any adverse public records (such as liens, foreclosures and bankruptcies), how long accounts are past due, and the number of past due items on file.

Using More than 80% of Available Credit
30% of the FICO score is based on amounts owed, taking into consideration factors such as the number of accounts with balances and the proportion of credit balances in relation to total credit limits. (For more information, see How to Improve Your Credit Score.)

Having a Short Credit History
Even though age is not considered in the FICO score, the length of a person's credit history is used in the calculation. A person who is younger will typically have a lower credit score than someone who is older, even when all other factors are the same. 15% of the FICO score is based on the length of credit history, including the amount of time since various accounts have been opened and used.

Too Many Requests for New Lines of Credit
The FICO score does not take into consideration any consumer or promotional initiated inquires. This means that individuals can check their own credit scores without risk of damaging the score, and companies that make inquiries before sending promotional notices (such as pre-approved credit card advertisements) will not impact the score. 10% of the FICO score is based on new credit. This 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 the amount of time since new accounts have been opened or credit inquiries have been made.

Using Only One Type of Credit
10% of the FICO score is based on the types of credit that are used. Having only one type of credit – a credit card, for example – can have a negative effect on the FICO score. A variety of credit types improves the score because it indicates the individual is a seasoned and experienced borrower.

Improving a Credit ScoreFICO acknowledges that "it's important to note that bad credit is a bit like losing weight: it takes time and there is no quick way to fix a credit score." FICO's advice for rebuilding credit is to "manage it responsibly over time." Individuals who are working towards improving their credit score can:

  • Check their credit report to identify problem areas
  • Setup payment reminders to pay bills on time
  • Reduce debt
  • Pay off debt rather than move it around
  • Keep credit card and revolving credit balances low
  • Apply for and open new credit accounts only if necessary

The Bottom Line
Credit scores are used by lenders to estimate credit risk. People with higher credit scores are often rewarded with more favorable terms, including lower interest rates on credit cards and mortgages. Conversely, those with lower credit scores can be penalized with less favorable terms and significantly higher interest rates. Achieving and maintaining a higher credit score requires an understanding of how the scores are calculated and what factors can negatively impact the scores. (To learn more, read The Importance of Your Credit Rating.)