Credit Scores: How Are They Calculated?

Most people know that credit scores determine what and how much you can borrow from lenders, but very few are actually knowledgeable about how credit scores are calculated.

When you attempt to borrow money from a financial institution or to obtain a credit card, the financial companies retrieve a copy of your credit report, which contains a score that qualifies (or disqualifies) you for the loan or line of credit.

Credit scores range from 340 to 850, and are used to determine the risk lenders take on when they give you money or credit. An individual with a credit score of 480 will pose a much larger risk to the lender than an individual with a credit score of 700. If you don’t know your credit score, it might be a good idea to find out.

The three credit bureaus - Equifax, Transunion and Experian – use a special type of software that uses the information in your credit report to generate a numerical score. Credit scores are sometimes called “FICO scores” because the first credit score software was produced and distributed by Fair Isaac Corporation—FICO.

Credit scores are calculated using the following information:

35% Payment History
30% Amount Owed
15% Length of Credit History
10% Types of Credit Utilized
10% New Credit Obtained

Payment History

Your payment history encompasses all of your past credit accounts – including loans, mortgages, financing and lines of credit. It will include the accounts that you have “paid as agreed”; negative accounts and collections; and delinquent accounts. Delinquent accounts will show how many accounts are past due, the amount of time that the account has been past due and how much time has elapsed since you’ve had a past due payment.

Amount Owed

The part that includes the amounts you owe will include how frequently you pay down your credit, how much of your revolving credit lines you've used, and the total number of zero-balance accounts. This is used to determine how frequently you pay off your debts and how much you continue to accrue as time goes on.

Length of Credit History

Your credit score will also reflect how long your credit report has been tracked and how long it has been since you’ve last opened an account. The longer your credit report is tracked, the higher your credit score will be as along as you continue to make payments and to avoid collections.

Types of Credit Utilized

There are many more types of credit than just credit cards. Your credit history encompasses mortgages, auto loans, business loans and all types of financing. When you’ve used several different types of credit – rather than just revolving credit, such as a credit card – your credit score will be higher.

New Credit Obtained

New credit refers to accounts that you have opened or paid off within the last six months. New credit doesn’t hold as much weight as older accounts because you’ve had less time to pay (or not pay).

Credit scores are generated by all three credit bureaus, and you might have three very different credit scores. The three bureaus use different ways of calculating credit scores, and one bureau might have more information than another. It is up to your lenders to report positive or negative credit, and if they report it to only one company, then it will not show up elsewhere.