Understanding How Your Credit Score Is Calculated

August 5, 2020 | by Jacob Hamilton

credit score calculated

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A credit score is calculated by weighing five financial factors—payment history, amounts owed, length of credit history, new credit and credit mix. Your financial habits impact your eligibility to get approved for loans, mortgages and lines of credit. Your credit score gives creditors a look at where your finances stand, but they will also look at your credit history, amounts owed and new credit.

To get you moving in the right direction, here are the main factors that go into how your credit score is calculated and how much of an impact they have.

What Makes up Your Credit Score?

In most cases, your credit score is ranked on a scale of 300 to 800. Payment timeliness, length of credit history, credit types and negative marks are collected from your credit report. Each factor is weighed by creditors and banks to determine your eligibility for loans and other financial benefits. There are different ways to calculate your credit score, which is why your score may look different from different sources.

The FICO® credit scoring model—the scoring model most often used by lenders—uses five categories to calculate your credit score:

  1. Payment History: The frequency of on-time payments.
  2. Amounts Owed: The total amounts owed on all lines of credit.
  3. Length of Credit History: The length of time an account has been open.
  4. New Credit: The number of new credit accounts opened.
  5. Credit Mix: The combination of ongoing loans and lines of credit.
what makes up your credit score

Let's take a closer look at how each category impacts your credit score.

1. Payment History

Payment history outlines your frequency of on-time payments. It lets lenders know if you’re financially responsible or pose a credit risk. This accounts for 35% of the FICO model and is the most important consideration.

2. Amounts Owed

Amounts owed refers to the sum of all open lines of credit and loans—basically, how much of your available credit you’ve spent. Having a high amount owed is a red flag to lenders. This accounts for 30% of your FICO score.

3. Length of Credit History

Length of credit history refers to how long you’ve had credit. Older credit accounts establish your credit foundation and can prove to lenders that you’re a responsible borrower. This accounts for 15% of your score in the FICO model.

4. New Credit

New credit examines the amount of newly opened credit accounts and loans. Banks and creditors perceive frequent new account openings as a sign of financial distress and irresponsibility. This serves as 10% of your score in the FICO model.

5. Credit Mix

Credit mix is the combination of the types of open accounts (loans, credit cards and other forms of credit). Having various open lines of credit diversifies your credit report and shows creditors that you can manage multiple financial accounts responsibly. This is 10% of your score in the FICO model.

What’s the Difference Between FICO and VantageScore?

The VantageScore model is slightly different from the FICO Score, examining six factors to determine your credit score. It adds one other factor, available credit, which shows how much you haven’t used in a line of credit.

Both the FICO and VantageScore are accurate in calculating your credit score. However, the FICO Score is considered an industry staple.

Next, we’ll take a look at the negative factors that can lower your credit score.

Negative Factors That Impact Your Credit Score

Negative factors like missed payments and accounts in collections can lower your credit score. Even missing one payment can cost you several points. While it's not impossible to overcome the deficit, it's a long road to recovery. Negative items can stay on your credit report for up to 10 years.

missing one payment

Late or Missed Payments

Late or missed payments will cause a temporary drop in your credit score. The marks can remain on a report for up to seven years.

Accounts In Collections

Accounts are sent to collections when you have frequent delinquent payments and can remain on a credit report for up to seven years.


Filing for chapter seven or chapter 13 bankruptcy happens when you cannot pay back a debt. It can stay on a credit report for up to 10 years.

Chapter 13 bankruptcy is a reorganization of your assets. You agree to pay creditors on a fixed payment plan until the rest of the loan is paid off.

Account Charge-Offs

Charge-offs occur when a creditor declares that a delinquent account can’t be collected. The account is written off as a financial loss. Charge-offs remain on your credit report for up to seven years.

Maxed Out Credit Cards

Maxing out credit cards refers to using the full amount of available funds on a credit card. The Credit Card Accountability Responsibility and Disclosure Act prevents you from exceeding credit limits unless you pay a fee. However, maxing out credit cards can drop your credit score several points and make it harder to get out of debt.

Closed Credit Cards

Old credit accounts are part of your credit history and credit mix. When an account is closed, this information gets deleted from your credit history and, as a result, your credit limit decreases—this can cause a drop in your credit score.

Multiple New Credit Applications

Opening new lines of credit causes soft and hard pulls on your credit report. These inquiries can temporarily lower your credit score.

If you already have multiple unpaid balances, this can raise a red flag for banks, mortgage lenders and creditors. They assume that you’re a high credit risk, so you’re more likely to be denied a loan.

Home Foreclosure and Loan Defaults

Foreclosures and defaults occur when a homeowner can no longer make payments on a loan. Banks and creditors will seize assets, often selling them to make up for the lost payments. Foreclosures and defaults can stay on a credit report for up to seven years.

When you have a low credit score, lenders are also more likely to deny your loan requests. For example, a “subprime borrower” is a high-risk borrower that is not likely to pay back the loan.

How to Improve Your Credit Score

Improving your credit score is imperative to healthy finances. To do this, developing a financial plan is your roadmap to success.

covid hardship

Here are five tips to help you start improving your credit score.

1. Download a free copy of your Annual Credit Report

Reviewing a copy of your credit report is the first stop for improving your credit score and looking for errors or signs of fraud.

2. Dispute credit report errors

Identifying credit report errors and writing letters to your credit lenders to fix them can remove negative marks, raising your credit score.

3. Seek help from a credit counselor or credit repair company

Hiring a credit repair company can help you identify credit errors and develop a financial plan to improve your credit score.

4. Pay off accounts in collections

Paying off accounts in collections will help prevent negative reporting.

5. Inquire about financial hardship programs

Due to the coronavirus pandemic, many financial lenders and credit card companies like American Express are offering financial hardship programs.

Your credit score is a lot more than three numbers, it's your financial lifeline. If your score is not where you'd like it to be, there are solutions. Downloading a free copy of your credit report is the first step. Understanding the factors that go into calculating a credit score takes time, but is well worth it in the long run. You can find free resources online or contact a credit repair specialist for personalized guidance.

Jacob Hamilton

Jacob Hamilton

GM of CreditRepair.com

With his master's degree from the University of Phoenix, Jacob has been working as the General Manager for CreditRepair.com for 2 years. Jacob is passionate about consumer finances and doing everything he can to make credit repair accessible....

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