How Credit Scores Are Calculated: The 5 Factors Explained
Ever wonder why a single missed payment can drop your credit score by dozens of points? Lenders rely on credit scores to judge how risky it is to lend you money. That number can influence everything from credit card approvals to mortgage rates and even insurance costs.
In this article, we’ll break down exactly how credit scores are calculated. You’ll see the five factors that make up your score and how each one carries weight in the formula. By the end, you’ll know where to focus your energy to keep your credit score healthy.
What Is a Credit Score?
A credit score is a three-digit number that shows lenders how likely you are to repay borrowed money. The higher the credit score, the lower the risk you appear to banks, credit card companies, and other lenders.
There are two main scoring models: FICO and VantageScore. Both range from 300 to 850, but lenders overwhelmingly use FICO when making decisions. While they share similarities, the way they weigh certain factors is not identical.
Comparison Table: FICO vs. VantageScore
| Feature | FICO Score | VantageScore |
|---|---|---|
| Score Range | 300–850 | 300–850 |
| Used By | More than 90% of lenders | Less common, but growing |
| Weighting | Clear 5-factor formula | Slightly different emphasis |
The 5 Factors That Make Up Your Credit Score
Your credit score is based on five specific factors. Each one carries a different weight in the formula, and together they add up to 100%. Knowing the breakdown helps you see which areas you can control to raise your credit score.
Payment History (35%)
Payment history has the strongest impact on your credit score. Lenders want to see that you consistently pay bills on time.
- On-time payments: The more bills you pay by the due date, the stronger this factor becomes.
- Late payments: A payment more than 30 days late can stay on your credit report for up to seven years.
- Collections or bankruptcies: Negative marks weigh heavily and signal higher risk to lenders.
Recent activity matters more than older history. Building a streak of on-time payments can gradually offset past mistakes.
Amounts Owed and Credit Utilization (30%)
This factor looks at how much debt you carry compared to your total credit limits. The main measure is your credit utilization ratio, which compares balances to limits.
Table: Credit Utilization Impact on Credit Score
| Utilization Percentage | Typical Impact on Credit Score |
|---|---|
| 0–9% | Positive |
| 10–29% | Neutral to slightly positive |
| 30–49% | Negative |
| 50%+ | Strongly negative |
Keeping your balances under 30% of available credit is often recommended, but the lower your ratio, the better it looks to lenders.
Length of Credit History (15%)
Your credit history shows lenders how long you have managed credit. The longer the track record, the more confidence lenders have in your reliability.
- Oldest account: The age of your first account matters.
- Average age of accounts: Older averages signal stability.
- New vs. old accounts: Opening new accounts lowers the average age, which can temporarily bring down your credit score.
Closing long-standing accounts can shorten your history, so weigh the impact before doing so.
Credit Mix (10%)
Credit mix refers to the types of credit accounts you have. Lenders prefer to see that you can handle more than one type.
- Revolving credit: Credit cards and lines of credit.
- Installment loans: Mortgages, auto loans, personal loans, and student loans.
Having both revolving and installment credit can strengthen this part of your credit score, but it should happen naturally over time rather than by opening accounts just for variety.
New Credit and Inquiries (10%)
When you apply for new credit, lenders check your credit report through a hard inquiry. Too many hard inquiries in a short period can lower your credit score.
- Hard inquiries: Multiple applications close together can signal risk.
- Soft inquiries: Checking your own credit score or receiving a pre-approval does not affect your credit score.
- Rate shopping: For mortgages, auto loans, or student loans, inquiries within a short window (typically 14–45 days) count as one.
Applying for new accounts occasionally is fine, but frequent applications can raise red flags with lenders.
How These Factors Work Together
The five factors are weighted differently, but they all connect to form one number. Payment history and credit utilization make up nearly two-thirds of the calculation, while the other three factors add depth and context to your profile.
Breakdown of Credit Score Factors
| Factor | Weight in Calculation |
|---|---|
| Payment History | 35% |
| Amounts Owed / Utilization | 30% |
| Length of Credit History | 15% |
| Credit Mix | 10% |
| New Credit and Inquiries | 10% |
Imagine two borrowers. One has never missed a payment but carries balances at 70% of their credit limits. Another has low balances but missed several payments last year. Even though each borrower struggles in different ways, both are likely to see lower credit scores because the formula weighs more than one area. This is why improving your score often requires a balanced approach.
How to Improve Each Factor
Improving your credit score takes time, but small, consistent steps can make a measurable difference. Each of the five factors can be strengthened with the right habits.
- Payment history: Pay every bill on or before the due date. Setting up autopay or reminders can help.
- Amounts owed and utilization: Aim to keep balances below 30% of your total credit limit, and pay down high-interest cards first.
- Length of credit history: Keep older accounts open when possible to maintain account age.
- Credit mix: Use different types of credit responsibly, but only open accounts when they make sense for your needs.
- New credit and inquiries: Space out applications and only apply for new credit when necessary.
Consistency is the key. Credit scores do not improve overnight, but steady progress in each area builds long-term strength.
Common Myths About Credit Score Calculation
There are several myths about how credit scores are calculated. Clearing up these misconceptions can save you from mistakes.
- Checking your own credit score: This is a soft inquiry and has no impact.
- Carrying a balance: Letting balances ride month to month does not help your credit score. Paying in full shows stronger financial health.
- One late payment ruins your credit forever: A late payment does hurt, but the impact lessens over time as you build new positive history.
Final Thoughts
Credit scores are built on a clear formula with five factors. By focusing on payment history and credit utilization while also keeping an eye on length, mix, and inquiries, you can steadily strengthen your profile.
Improvement is about consistent habits rather than quick fixes. When you know how each factor works, you can make smarter decisions that add up to a higher credit score and better opportunities with lenders.
