How credit scores are calculated, and what actually moves them
A credit score is a summary of your credit report, not your income or savings. Here is what goes into FICO and VantageScore models, what they ignore and how lenders use them.
A three-digit number affects the interest rate on a mortgage, approval for a credit card, the deposit on an apartment and sometimes the price of car insurance. Credit scores can feel mysterious, but the main ingredients are published by the companies that build them. Knowing those ingredients makes it easier to tell useful advice from myths.
Credit reports come first
A score is calculated from a credit report, so the report is the foundation. In the US, the three nationwide consumer reporting agencies, Equifax, Experian and TransUnion, collect information from lenders about your accounts: credit cards, auto loans, student loans, mortgages and some other debts. Reports show the type of account, when it was opened, the credit limit or loan amount, the balance and the payment history. They also list inquiries from lenders and certain public records, such as bankruptcies.
Because lenders do not all report to all three agencies, your three reports can differ, and so can scores built from them. Under federal law you can get free copies of your reports. The official site for this is AnnualCreditReport.com, and the three agencies now allow free weekly online reports there.
The Consumer Financial Protection Bureau notes that reports often contain errors. You have the right to dispute inaccurate information with the reporting agency and the company that supplied it.
Two main score families
Most lending decisions use scores from FICO or VantageScore. Both typically range from 300 to 850 in their current general-purpose versions, and higher is better. There are many versions of each, and lenders choose which to use, so the score you see in a free app may not be the exact score a mortgage lender pulls. Mortgage lending has traditionally relied on older FICO versions; the Federal Housing Finance Agency has announced changes to allow other models for loans sold to Fannie Mae and Freddie Mac.
What goes into a FICO score
FICO publishes the general weights for its scores for the general population:
- Payment history, about 35%. Whether you have paid accounts on time. Late payments, collections and bankruptcies weigh heavily. A payment is usually not reported late until it is at least 30 days past due.
- Amounts owed, about 30%. Especially credit utilization, the share of your available revolving credit you are using. Using $3,000 of a $10,000 total limit is 30% utilization. Lower is generally better.
- Length of credit history, about 15%. The age of your oldest account, newest account and the average age.
- New credit, about 10%. Recently opened accounts and hard inquiries from applications.
- Credit mix, about 10%. Experience with both revolving accounts, like cards, and installment loans, like auto loans.
FICO stresses that these are general weights and that the importance of each depends on the whole profile. VantageScore uses similar categories with its own weightings.
What scores ignore
Credit scores do not include income, employment, savings, race, religion, national origin, sex, marital status or age. The Equal Credit Opportunity Act bars creditors from considering several of these factors in lending decisions. Lenders do look at income and debts separately, for example through a debt-to-income ratio on a mortgage application, but those are not part of the score.
Checking your own score or report is a soft inquiry and does not affect your score. Hard inquiries happen when you apply for credit. Scoring models generally treat several inquiries for the same type of loan within a short window, such as rate shopping for a mortgage or auto loan, as a single inquiry, so comparing lenders does not multiply the damage.
Common myths
- Carrying a balance builds credit. It does not. Paying your card in full each month shows on-time payment and avoids interest. What matters for utilization is the balance reported, usually the statement balance.
- Closing old cards helps. It can hurt, by reducing your available credit, which raises utilization, and eventually by shortening the average age of accounts.
- Paying off a collection erases it. Paid collections can remain on a report for up to seven years from the original delinquency, though some newer scoring models ignore paid collections and medical collections are treated differently by the reporting agencies.
- A debit card builds credit. Debit cards draw on your own money and are not reported as credit.
How long negative items last
Under the Fair Credit Reporting Act, most negative information, such as late payments and collections, can be reported for seven years. Chapter 7 bankruptcies can be reported for 10 years. The impact on scores generally fades over time, especially if recent history is clean.
Practical steps
- Pull your free reports and dispute errors.
- Set up automatic minimum payments so nothing is ever 30 days late.
- Keep revolving balances low relative to limits, and pay before the statement date if you use a card heavily.
- Apply for new credit only when you need it.
- For people with thin files, a secured card or a credit-builder loan from a bank or credit union that reports to all three agencies can help establish history.
The bottom line
Credit scores mostly measure two things: whether you pay on time and how much of your available credit you use. The rest matters at the margin. A clean, accurate report and steady habits do more than any trick.
This article is general information, not financial advice.