How Your Credit Score Is Actually Calculated
Your credit score decides what you pay to borrow, yet the formula can feel like a black box. Here are the five things that move a FICO score, and how much each one really counts.
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A credit score is a three-digit number that lenders use to estimate how likely you are to repay borrowed money. It influences whether you get approved for a loan or card, and what interest rate you pay, which over a mortgage can add up to tens of thousands of dollars. The good news: the formula is not really a mystery. Five factors drive it, and you can influence all of them.
The scale
The most widely used score, the FICO score, runs from 300 to 850. Higher is better. Lenders set their own cutoffs, but as a rough guide, scores in the mid-700s and up are generally treated as very good to excellent, and unlock the best rates. There is also a competing model, VantageScore, that uses the same 300 to 850 range.
The five factors, ranked
FICO does not publish an exact formula, and the weightings shift somewhat for each person, but the approximate breakdown is well established:
- Payment history, about 35%. Whether you pay on time. This is the single biggest factor. Even one payment that goes 30 days late can do real damage, and it can stay on your report for years.
- Amounts owed, about 30%. Mostly your credit utilization, the share of your available credit you are using. Using a small fraction of your limits helps; running your cards near their limits hurts.
- Length of credit history, about 15%. How long your accounts have been open. Older is better, which is why closing your oldest card can backfire.
- New credit, about 10%. Recently opened accounts and hard inquiries. Applying for several products in a short window can ding your score.
- Credit mix, about 10%. Having a healthy variety, such as a card plus an installment loan, helps a little. It is the smallest factor, so it is not worth taking on debt you do not need.
The 30% rule of thumb
A common target is to keep your credit utilization under about 30% of your total limit, and lower is better still. If your cards total $10,000 in limits, try to keep reported balances under $3,000. Paying down balances before the statement closes is one of the fastest ways to nudge a score up.
Hard versus soft inquiries
Not every credit check counts against you. A soft inquiry, such as checking your own score or a pre-approval offer, has no effect. A hard inquiry, which happens when you actually apply for credit, can lower your score slightly for a short time. Scoring models usually treat multiple mortgage or auto inquiries within a short shopping window as a single inquiry, so rate shopping is not penalized the way it might seem.
The fastest levers are the two biggest factors: pay every bill on time, and keep your balances low relative to your limits. Do those two things consistently and the rest tends to follow.
What is not in your score
Your score does not include your income, your bank balance, your job, your age, or your race. It is built purely from the information in your credit reports, the record of how you have borrowed and repaid. You are entitled to review those reports for free at AnnualCreditReport.com, and checking them for errors is one of the simplest ways to protect your score.
The takeaway
A credit score rewards two boring habits above all: paying on time and not using too much of your available credit. Everything else, from the age of your accounts to your credit mix, is a refinement on top of those two. Treat it as a long game, because the length of your history matters, and small consistent habits compound into a strong score.