How is your credit score is calculated?

Establishing and building good credit can be an important part of managing your personal finances.

Many companies use credit scores when reviewing credit applications and managing their customers' accounts. If you have a high score, you might be able to get approved for credit cards and loans with more favorable terms. Even if you never borrow money, good credit can help when you move, apply for a job, get a phone or buy insurance.

Below, we'll focus on credit scores, explain what they are, how they work and what you can do to improve your credit scores.

What is a credit score?

Credit scores are easy-to-understand numbers that can help people estimate how likely someone is to miss a bill payment.

Your credit scores are the result of programs — credit scoring models — analyzing one of your credit reports.

Anyone with a credit history has a different credit report from each of the major credit bureaus: Equifax, Experian and TransUnion. When a person or company orders a credit report, they can choose to get one (or several) credit score based on the report.

Credit scores specifically analyze credit reports to predict the likelihood that someone will miss a bill payment by at least 90 days during the next 24 months. The science is complex, but the basic idea is to figure out what information in a credit report most accurately predicts the likelihood of a missed payment in the future.

For example, someone who previously missed payments might be more likely to miss another payment than someone who always pays bills on time. So if you miss a payment, your credit score might decrease.

Each of your credit reports can contain hundreds of data points, and it can be difficult to analyze a report to make accurate predictions. Some large lenders create their own proprietary credit scoring models, but many companies use credit scores from FICO or VantageScore.

Most of the FICO and VantageScore credit scores range from 300 to 850. A higher score is better, and it indicates someone is less likely to miss a bill payment. Both companies also regularly release new versions of their credit scoring models to take advantage of access to new data and incorporate changing consumer behavior.

Why is your credit score important?

Establishing and building your credit can give you access to more financial products and better offers. For example, your credit can impact:

• Your eligibility for a loan or credit card
• The interest rate and fees you have to pay when borrowing money
• How much you can borrow
• Your credit cards' credit limits

Your credit scores can also affect non-borrowing decisions, such as if you can rent an apartment or whether you have to send a company a security deposit to open a new phone or utility account.

Additionally, your credit history, but not your credit scores, might affect your ability to get a job or promotion. In many states, insurance companies can also use a credit-based insurance score when reviewing insurance applications and setting premiums.

How is your credit score calculated?

There are many types of credit scores and each one might take a slightly different approach to calculating a score. However, most credit scores try to predict the same thing using the same underlying information from one of your credit reports.

As a result, many credit scores consider similar data points, and these are generally broken into five categories. FICO, which creates some of the most widely used credit scores, shares more details about what goes into each category for its scores:

• Your payment history (35%): Making payments on time can help your credit as long as those payments get reported to the credit bureaus — most credit cards and loans do. Missing payments, having accounts sent to collections and filing for bankruptcy can hurt your credit.
• How much you owe (30%): How much you owe overall and on various types of accounts, the number of accounts with balances, the types of accounts with balances and your balances relative to your initial loan amounts can all affect your credit score. Your credit card balance relative to its credit limit — called a credit utilization ratio — is a major factor in this category.
• The length of your credit history (15%): The age of the opened and closed accounts in your credit report can also affect your scores. Having old accounts and a high average age of accounts might help your score.
• Recent credit activity (10%): Opening new credit accounts lowers the average age of your accounts, and having a recently opened account might hurt your score a little. Applying for an account also often results in a hard inquiry — a record of when a creditor checks your credit report during an application. Hard inquiries can also hurt credit scores, but they're often a minor factor. Checking your own credit results in a soft inquiry, which won't affect your credit scores.
• Your credit mix (10%): Having experience with revolving credit accounts, such as credit cards, and installment accounts, such as loans, can help your credit.

FICO's percentage breakdown is for an average consumer, and it can vary depending on the type of credit score and your specific credit history.

What are the different FICO scoring models?

FICO has been creating credit scores for decades, and it regularly creates and releases new versions of its credit scores. It also offers several types of credit scores:

• Base FICO Scores: Any type of lender can use base FICO scores to help evaluate risk when making a lending decision. The recent versions of these scores go in chronological order. Many lenders use FICO Score 8, but there are newer FICO Score 9 and FICO Score 10 models available. Base FICO scores range from 300 to 850.
• Industry-specific FICO Scores: FICO also creates industry-specific credit scores for auto lenders and credit card issuers. These models use an existing base score and adjust it based on relevant data, such as your history with auto loans. For example, there is a FICO Auto Score 8 and FICO Bankcard Score 9. The industry-specific scores range from 250 to 900.

FICO also creates a few other types of credit scores. For example, the UltraFICO Score allows consumers to connect their bank account when applying for a credit account. Their banking history could then affect the credit score, which can be helpful if they manage their money well or don't have a credit history.

How can you improve your credit score?

If you want to improve your credit scores, focus on the most important factors and the underlying data that affects all your scores — your credit reports. Here are a few tips:

• Pay your bills on time: Having a long history of on-time payments is the best way to improve your credit. Missing payments, having accounts sent to collections or filing for bankruptcy can hurt your credit scores. Even accounts that don't get reported to the credit bureaus can wind up hurting your credit if they get sent to collections.
• Lower your credit utilization ratio: Your revolving credit utilization ratio is one of the few factors that you can quickly change to improve your credit scores. It depends on the balance and credit limits of revolving accounts in your credit report, such as credit cards. Paying down credit card debt and lowering your utilization rate could help your scores, especially because most credit scores only consider your most recently reported balance.
• Make early credit card payments: Many credit card issuers report your balance to the bureaus at the end of each billing cycle, a few weeks before your bill is due. As a result, you might have a high utilization rate even if you pay off your credit card balance each month. But making early payments could lower your reported balance and utilization rate. Try to keep you balance at one-third or less of your credit limit, as credit bureaus view this as responsible credit utilization, which will typically reflect positively on your score. Carrying a balance doesn't help your credit scores — that's a myth.
• Strategically apply for credit: Applying for credit cards and loans can lead to hard inquiries, which might hurt your credit scores even if you don't get approved. However, credit scores don't penalize you for shopping for a loan, such as when you get multiple auto loan or mortgage quotes. They may count multiple hard inquiries from a short period, such as 14 days, as a single inquiry for scoring purposes.
• Add alternative data to your credit reports: Some of your monthly bills usually don't get reported to the credit bureaus, such as your rent, utility and phone payments. However, you can use third-party services to add these payments to at least one of your credit reports, which might help your credit scores that are based on that report.
• Review your credit reports for errors: Inaccurate negative information, such as an account with a late payment when you paid the bill on time, could be hurting your credit. Review your credit reports for errors and fraudulent accounts. If you find one, you can submit a dispute to the bureau for free. The credit bureau can investigate what happened and then verify, change or delete the information.

What doesn't affect your credit score?

Most credit scores only consider information that's in one of your credit reports. And, even then, they don't consider everything.

Some of the things that never affect your credit scores include:

• Your income
• Where you live
• Your marital status
• Your employment status and work history
• Your age, race, gender, sex, nationality, religion or political affiliation
• The interest rate on your accounts
• If you work with a credit counselor

Some of these, such as your income and employment status, can affect your credit worthiness and ability to qualify for financing. But they still don't impact your credit scores. If you believe any of these factors were used in calculating your credit score, you can file a report with the Consumer Financial Protection Bureau.

When will your credit score change?

Your credit score is a snapshot of your credit at a specific point in time. It isn't updated or refreshed — it's an add-on when someone requests one of your credit reports. The resulting score can change whenever information is added or removed from your report.

Additionally, the scores you see will depend on the type of credit score and which report it's scoring. Differences aren't errors. They're simply the result of different calculations. You also won't necessarily know which type of score or credit report a lender will request when you apply.

How long it takes to see a big change will depend on where you're starting, what you're changing and the type of score. However, most credit scores trend in the same direction over time. So, if you're taking steps to improve one of your scores, you might see all your scores increase over time.

Where can you find your credit score?

There are a few ways you can get your credit reports and scores:

• Many credit card issuers and lenders will give you access to a credit score. It may be the score they use to monitor your account, or a different score that they offer as a service to customers.
• Some websites, like Credit Karma and NerdWallet, offer free credit scores and score tracking. The credit bureaus may also give you a credit score based on your report from that bureau. Many of these sites make money when you apply for new financial products through the website.
• You can get weekly free copies of your credit report from AnnualCreditReport.com, but the reports don't come with credit scores.

The FICO and VantageScore websites can point you to some of the companies and services that offer free credit scores. Some companies also offer paid subscription services that let you check and track your credit scores.

Build your credit history with the card that is right for you

Building your credit can help you prepare for life's biggest expenses and unexpected emergencies. Whether you're just starting, working from good to excellent or trying to rebuild your credit, Citizens is here to help.

Review Citizens credit cards to find a card that fits your lifestyle — Citizens will report your account and payments to all three credit bureaus. And explore additional financial resources and tips online, 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.