What Factors Go Into Determining Your Credit Score?

A three-digit credit score is the number that represents an individual's creditworthiness rating. It demonstrates to lenders - such as banks, credit card companies, and other potential creditors - how risky it may be to do business with you as a borrower.

Credit scores are calculated using credit scoring models. These unique algorithms analyze your payment behavior, debt, and spending habits which ultimately are translated into a credit score which typically ranges from 300 to 850. There are three major credit bureaus in the United States that record credit scores and provide them upon request to interested parties.

The two main consumer credit scoring models are FICO® and VantageScore®. They both vary in how they calculate and report your score, and both also offer unique versions of scoring models designed for a specific industries and custom use cases for various purposes across a wide range of industries and services.

The credit score, for example, impacts not only the size of a loan that a consumer may qualify for but also the interest rate on that loan, or the interest and/or credit limit on a credit card. In some cases, a good credit score may even be a requirement when applying for a job or a house rental. Therefore, Equifax, Experian, and TransUnion offer an assortment of credit-related reporting products. While an individual can request their own credit report, the credit bureaus have also designed specialized models for creditors, loan companies, government agencies, and even for the rental and employment markets.

Below, we'll briefly discuss the general most important factors considered by credit bureaus in calculating a credit score. These factors are split into several categories with their approximate weight or relevancy on the overall score, as follows:

Payment history (35%)

The payment history category considers whether you have exercised your payment obligations on time and consistently. A history of missed or late payments and public records on bankruptcies, collections, or delinquencies may substantially hurt your credit score. It's crucial to make on-time payments to maintain a good score.

The amount owed (30%)

The category of the amount owed relates mainly to your credit usage and, in particular, to your credit utilization ratio. It is determined by adding up your current balances on all your credit card accounts, dividing that amount by the sum of credit limits on all your credit card accounts, and multiplying by 100. The percentage you get is your credit utilization rate, and the lower it is, the better. You shouldn't be afraid to use your cards, just use them wisely and make consistent payments that are (whenever possible) more than the minimum payment owed.

Length of credit history (15%)

The length factor considers how long you have been using your credit accounts. The general rule is that the longer your history, the better your score will be. However, people with a short history but who have other categories in good standing can still have a high credit score.

New credit (10%)

Whether you are new to credit or currently working on improving your credit profile, you should be careful not to apply for multiple credit card applications within a short period. By frequently applying for new credit, lenders may get the impression that you're under financial pressure or unable to use your existing credit responsibly. Such a habit may result in a dip in your credit score. You should always think twice before applying for new line of credit.

Credit mix (10%)

The credit mix category is about your ability to manage different types of credit. For example, lenders perceive you positively if your credit accounts include both revolving credit (credit cards, retail store cards, gas station cards, lines of credit) and installment credit accounts (mortgages, auto loans, student loans).

The weight of each factor may vary depending on the scoring model used by a particular lender. For example, when it comes to auto loans, an auto lender might use a credit score that weighs your payment history more than the other factors, or they may use a blended score from the three major bureaus.

To maintain consistency and ensure accuracy, it's a good idea to review your credit report at least once a year. This will make sure you're informed and also give you the chance to take timely measures toward corrections or improvements, especially if certain factors are hurting your score - including any errors. At the same time, your lender may consider additional information that is not included in your report (such as your income, employment type, etc.) to estimate your borrowing reliability, which is important to keep up to date.

Understanding how your credit score is calculated and using that knowledge to your advantage will put you on the path to good spending practices and healthy credit habits.

Read more about how you can easily check your credit report for free in our blog.