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How Your Credit Score Is Calculated

Key Takeaways

  • FICO uses an algorithm to predict customer spending habits and rates their financial responsibility on a scale of 300 to 850.
  • These five factors are used to calculate your credit score: payment history, credit utilization, length of credit, amount of new credit, and credit mix.
  • Check in on your accounts regularly so you have a solid understanding of your finances and ultimately your credit score.

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

You likely understand the basics of how your credit score works. You pay off your debts on time and your credit score goes up, right? Not exactly.

Let’s discuss how you actually get a good credit score and how the system works so you can make it work for 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 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 meeting credit card minimum payment requirements on time, you may still end up with a high balance on the card, which will negatively impact your credit score. To learn more about this, read below about credit utilization.

  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 you avoid closing out credit lines that you’ve had for a long time when trying to improve your length of credit history. However, it’s still important to stay active in 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 accounts have been opened in the past 6-12 months/how long it’s been since you’ve opened any new accounts (and what those accounts are)
    • 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 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.

    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 it 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, such as finance company accounts that indicate the debtor was not approved for a loan through other financial institutions with lower interest rates, and some retail accounts that indicate frequent spending on luxury goods. Some debt is good debt, but try to avoid taking out loans through less reputable institutions.

The bottom line

There are many ways to build a good credit score, but one of the best ways is by checking in on your accounts regularly and having a solid understanding of your personal finances.

More information

We are committed to helping you reach your potential by providing personalized solutions. Our dedicated colleagues can help you find the right product to help you reach your goals. To learn more, please call 1-888-333-5145, visit us online, or Ask a Citizen at your nearest Citizens Bank branch.

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