How Are Credit Scores Calculated?

Credit scores are calculated using complex algorithms that consider factors such as your payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.

Your credit score isn’t just some boring number — it’s a magic carpet to your financial escapades and the key to unlocking your future dreams. Let’s dive into how are credit scores calculated to help you stay in the know, keep your score high, or pump it up if it needs work. 

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How is a FICO score calculated?

Your FICO score is a numeric representation of your credit history, demonstrating to lenders how likely you are to repay a loan. That affects how much lenders will allow you to borrow and at what interest rate. 

A score above 800 is exceptional; 740-799 is very good; 670-739 is good; 580 to 669 is fair; below 580 is poor. That score is calculated based on 5 different factors of varying importance. 

Payment history (35%)

The biggest factor in your credit report is whether you have paid your bills on time in the past. It accounts for 35% of your FICO score. Lenders feel it’s a predictor of whether you’ll pay back your loans in the future. 

Amount owed (30%)

The next-biggest chunk of your credit score comes from the debt you hold. Having debt isn’t necessarily a bad thing. However, a large amount of debt combined with other risk factors may signal to borrowers that you may struggle to pay off your loans as your debt increases. 

Length of credit history (15%)

Your credit report will take into account the age of your oldest accounts and the length of time you’ve had your newest accounts. The longer you’ve had to develop your credit history, the higher this portion of your score will be. 

New credit (10%)

Opening several new lines of credit at once can signal to lenders that you’re in a tough financial position. New credit accounts for 10% of your FICO score.

Credit mix (10%)

Not all loans are one and the same. That variety impacts your credit score, showing lenders that you haven’t put all your eggs in one basket.

How is VantageScore 4.0 calculated?

Like your FICO score, your VantageScore is a numerical representation of the health of your credit and the risk you pose to lenders. Vantage 4.0 uses the same 300 to 850 range as FICO. However, Vantage 4.0 grants a little more leeway with what it considers a good score and considers different things when calculating that score. 

• Payment history (41%): Vantage 4.0 weighs whether you’ve made your previous payments on time more heavily than FICO. 
• Depth of credit (20%): Vantage 4.0, like FICO, considers how long your lines of credit have been open. 20% of your Vantage 4.0 score is made up of the average age of your credit, plus consideration of your oldest and newest accounts. 
• Credit utilization (20%): Your credit utilization is the ratio of credit you have available to how much you have used. It’s inspected based on individual accounts, so having one card maxed out could bring your score down even if your average utilization is low.  
• Recent credit (11%): Hard inquiries into your credit report can bring the score down. Applying for new lines of credit means you’ll likely have more hard inquiries. 
• Balances (6%): The total amount owed on your accounts, including delinquent ones and those where you’ve kept up with your payments, will impact your Vantage 4.0 score. A high balance — or owing a lot of money — can hurt your score.
• Available credit (2%): This is simply how much money you have available through your lines of credit. A higher number can raise your score ever so slightly.

What is not included in a credit score calculation?

Your credit score is meant to reflect your trustworthiness as a borrower. It’s a review of your financial security, not you. Personal information is not factored in.

• Age: Your age doesn’t impact your credit score, though the age of your accounts does. 
• Income: How much you make doesn’t matter; the ratio of how much you spend on credit versus how much you pay off does.
• Sex or gender: These things cannot be held against or used in your favor. 
• Employment history – getting fired from a job doesn’t necessarily mean your credit score will go down; however, if you miss bills, that can have an impact. 
• Where you live: The state where you live and whether you’re in an apartment or house do not matter for your credit score. 
• Public records other than bankruptcy: Things like your criminal history, child support obligations, and civil judgments don’t directly impact your credit score.

Tips to improve and maintain your credit score

Your credit score is within your control. You can raise it by making small, simple changes.

• Pay loans on time: Your payment history makes up a huge chunk of your credit score. Paying on time every month will help gradually raise it.
• Dispute inaccurate information: Review your credit report. If you see any errors, contact the credit bureaus to have that information removed and raise your score.
• Take out a credit builder loan: These are loans where the money goes back to you at the end, and they are intended simply to build your credit by showing that you can pay the money back on time. 
• Lower your revolving utilization: Rely less on your credit card to raise the ratio between your available credit and what you’ve spent. 
• Improve credit mix: Remember, having different lines of credit can aid your score. 

What’s in a credit score

In summary, credit scores are determined by analyzing various aspects of your financial behavior and credit history.

FICO Scores and Vantage 4.0 scores are both used by different lenders to determine whether to loan you money, for how long, and at what interest rate. If you’re curious to learn what’s in your credit score and how it measures up, make sure to explore credit tools from MoneyLion.

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