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How Your Credit Score is Calculated

You know credit scores are important, but you may be wondering how they are calculated and what the big deal is. This all-important number can be looked at for a multitude of reasons: when you get a job, lease an apartment, open a new account, or apply for a loan—including a home loan.

Understanding credit scores, credit utilization ratios, scoring calculations, payment history, length of credit history, and credit scoring models will arm you with the information you need to review—and even improve—your credit score. And it’ll come in handy when you’re ready to purchase or refinance a home.

How a Credit Score Is Calculated

The most common credit score used is called your FICO score, which stands for Fair Isaac Corporation, a data company that tracks and measures credit risk. The score is calculated using information contained in your credit reports with each of the three main reporting agencies, then compiled and weighted to get your score, which in turn can affect how much a lender will loan you and at what interest rate.

While the exact formula is unknown, we do know that FICO scores are calculated by considering five distinct categories. The importance of each varies, as well as the factors within every category.

Payment History (Weight: 35%)

Have you paid past credit accounts—including installment loans like auto loans, medical bills, and student loans—on time? How many accounts have late or missed payments?

Amounts Owed (Weight: 30%)

How much do you owe on your credit accounts, and how many accounts do you have? How much of your total available credit—also known as your credit utilization ratio—are you using?

Length of Credit History (Weight: 15%)

The longevity of your credit history is important. How long have your credit accounts been established? What is the average age of these accounts, and how long has it been since you last used some of those accounts?

Credit Mix in Use (Weight: 10%)

What types of credit accounts do you have? How many different types of credit accounts are you using?

New Credit (Weight: 10%)

How many new accounts or recent inquiries do you have on your credit report? How long has it been since you opened new credit accounts or credit limits?

Credit Score Ranges

Credit scores range from 300 to 850. These scores can be subjective, and all lenders are different, but in general, these credit scores translate to:

  • 800 or higher: Exceptional

  • 740–799: Very good

  • 670–739: Good