How your credit score is calculated

You probably hear about credit scores all the time. But how much do you actually know about them?

The basics of how credit scores work are likely known — you pay off your debts on time and your credit score goes up, right? Not exactly.

Let’s review how you can get a good credit score and how the system works so you can make it benefit you.

What is FICO? and how does it know my credit score?

FICO is a software company based in San Jose, California. The name used to be “Fair Isaac Co,” in honor of its founders, Bill Fair and Earl Isaac. The name was later shortened to FICO officially, and is now recognized as a leading analytics software company that lenders use to get customer credit scores.

FICO uses an algorithm to predict customer spending habits and rates their financial reliability on a scale of 300 to 850, otherwise known as a credit score.

What's the difference between my FICO score and my credit score?

Your credit score is determined by private companies like FICO, but FICO is the most recognized company that banks and lenders use to determine customer lending potential.

How does FICO determine my credit score?

Your credit score is rated on these five components:

1. Payment history is responsible for 35% of your FICO credit score. While it’s mostly determined by on-time payments, other parts of your payment history include:

• The details of your late payments:
  • How late the payments were
  • The amount that was owed
  • How recently the late payments happened
  • The number of late payments
• Long-term/serious delinquencies:
  • Bankruptcies
  • Lawsuits
  • Property liens
  • Judgments
• Types of accounts (see “credit mix” section below)

The most straightforward way to improve your credit history is by making payments on time. However, remember that minimum payments on installment loans work differently than minimum payments on open credit lines like credit cards. Even if you’re making the minimum credit card payment requirements on time, you may still end up with a high balance on that card, which will negatively impact your credit score.

2. Credit utilization ratio influences 30% of your FICO credit score and is determined by how much total debt you have compared to how much credit you have available. Credit utilization ratio is determined by:

• The amount of debt you owe to lenders
• The number of accounts with outstanding debt
• The amount of debt owed on individual accounts
• The percentage of open credit line in use (credit cards)
• The percentage of debt still owed on installment loans (car loans and mortgages)

It’s important to stay on top of your spending and, if you can, pay off the balance on your credit card periodically rather than waiting to pay it off in one large sum.

3. Length of credit history determines about 15% of your FICO credit score. This percentage can be broken into three parts:

• How long accounts have been open
• How long specific account types have been open
• How long it’s been since those accounts were used

Industry experts recommend against closing out credit lines that you’ve had for a long time when trying to improve your length of credit history. It’s also important to use all of your accounts so they don’t qualify as unnecessary credit.

4. Amount of new credit determines 10% of your FICO credit score. The factors that play into this percentage are:

• Positive credit information on a recovering credit report (actively using a credit card and making timely payments on an account that used to make late payments)
• How many, and the nature of accounts that have been opened in the past 6-12 months/how long it’s been since you’ve opened any new ones
• How many credit inquiries have been made recently and how long it’s been since any credit inquiries have been made

Improving your credit score in this category starts with having a credit history. Applying for loans and credit cards means being subject to a “hard inquiry,” which is basically a background check on your credit history. For people with extensive credit histories, this type of inquiry may only shave five points off their credit scores, but if you have a less established credit history your score could take a more serious hit. The good news is that the drop is only temporary.

Try not to apply for more credit than you need; subjecting yourself to multiple inquiries in a short timeframe could impact your credit score. This doesn’t mean you should never apply for credit cards and loans; just think critically about how much credit you need before taking them out.

5. Credit mix is the variety of credit accounts you have, and this determines another 10% of your credit score. The kinds of debts and how they impact your score are:

• Credit cards
• Retail accounts (department store credit cards)
• Installment loans (loans you make payments on regularly, like car and student loans)
• Finance company accounts (loans taken out through lenders that specifically offer high-interest loans to people who wouldn’t otherwise be able to get a loan)
• Mortgage loans

Creditors want to see that you’ve had experience with various types of loans. However, there are some types of loans that will still negatively impact your credit score. It’s important to try to avoid taking out loans through less reputable institutions.

What doesn't affect my credit score?

There are some things that might affect you financially but won’t change your credit score.¹ Some of those include:

• Paying with a debit card
• Getting married or divorced
• Having high interest rates on your accounts
• Having a credit application be denied
• Getting help from a credit counselor
• Soft credit inquiries (this is a credit check that doesn’t affect your credit score in any way, since you’re not actually applying for the credit line. Once you go through with the application, this will become the hard inquiry).

How can I improve my credit?

Everyone has a unique credit card situation, but here’s a few things that can boost your credit score:²

• Review your credit reports from all of the credit report agencies. Check for inaccuracies, signs of identity theft or fraud, and make sure there are no unpaid accounts that have gone into collections. If there are, you should pay off as many old debts as you can, as soon as you can. If there are false items or something that needs to be fixed, you can write a letter to each of the three credit bureaus with an explanation of what needs to be adjusted and why it’s incorrect.
• Make your payments on time. It might be a no brainer, but one of the best things you can do for your score is to pay your debt on time and in full if possible.
• Keep your credit utilization low. If you can, try to keep your rate at 30% or below. It doesn’t hurt to call your credit card companies and ask them to increase your credit limit so your usage is lower — just make sure you don’t spend extra money just because you can!
• Be thoughtful when applying for new accounts. When you apply for a new credit card or line of credit, it will usually hit you with a hard inquiry on your credit report, which can negatively affect your credit score. When you open a new line of credit it also decreases the average age of your credit history (also referred to as Average Age of Accounts, or AAoA), which also affects your score.
• Keep your old accounts open. If they’re paid off, try not to close your accounts out. This will help maintain the length of your credit history and could help your utilization rate.

Where can I get my credit score?

According to the Consumer Financial Protection Bureau, there are a few ways you can get your credit score.³

• Most credit card, auto loan companies and financial institutions where you hold accounts usually have some sort of monthly score tracker. The score may be listed on your monthly statement or in your online account.
• You can use a service like Credit Karma or Experian to track your credit score. These sites will also send email alerts when you open a new account or have a hard inquiry on your report so you can review it in real time to make sure it’s accurate.
• You can get one free copy of your credit report once a year from each of the three major consumer reporting bureaus (Equifax, Experian and Transunion). Just visit AnnualCreditReport.com or call 877-322-8228. You can request the reports all at once or separately, but if you do separate requests, you’ll need to request them four months apart. After you’ve received your annual free credit report, you can ask for additional reports for $14.50 each if you need updates later that same year.

More information

Building your credit is important to help position you for life’s biggest expenses. Whether you are just starting to build your credit score, seeking to improve it, or simply want to better understand how it works, Citizens is here to help. Explore additional financial resources and tips or stop by your nearest Citizens branch for personalized assistance. Our dedicated colleagues are ready to help you find the right product to help you reach your goals.