How is credit score calculated?

You might see your credit score as just a three-digit number. But in reality, it’s used as shorthand for your credit history. And, it can have a huge impact on your financial life. Lenders use it as a critical factor for approval for credit cards, auto loans, and mortgages, for example. And a landlord could use it when deciding whether to approve you for a lease.

Maintaining a higher credit score can have some serious advantages. Among other benefits, a high score can increase your chances of qualifying for a loan and even reduce your interest costs. You may have heard that paying your bills on time is the number one factor that affects your credit score. But there are four other important factors also used to calculate your credit score. Understanding each can give you the keys to unlock a higher score.

If this seems like a lot of moving parts to keep track of, don’t worry—Spruce has got your back. Read on to learn how credit scores work, what factor has the biggest impact on credit scores, and what you can do to raise your credit score.

Plus, learn how Spruce can help you on your financial journey with access to your free credit score^{Disclaimer number5. Go to disclaimer for more details.}.

What affects your credit score? 5 factors

Your credit score calculation is based on information in your credit report. There are several credit scores available, but the one most used by lenders across the country is FICO, which is developed by Fair Isaac Corporation. Take note that Fair Isaac is not a credit bureau or credit reporting agency, rather Fair Isacc determines credit score calculation methodology, which use a credit bureau or agency’s credit report information as input.

Five factors make up your FICO credit score: payment history, amount owed, credit history, new credit, and credit mix. Some of these factors are more important than others. In fact, each is given a specific weighting that affects how your credit score is calculated.

Here’s a closer look at each factor, what influences it, and the steps you can take to work toward a good score. 

1. Payment history (35%): This is the big one. Your payment history has the greatest impact on your FICO credit score. It tracks your history of paying bills on time. Spoiler alert: Lenders love to see a long track record of on-time payments. Your payment history also tracks whether you’ve missed payments, defaulted on loans, or had debts sent to collection agencies.

There are some simple things you can do to help improve your payment history. Creating a budget is an important first step, helping you set aside enough money to pay your bills on time each month. Also set reminders so you don’t forget to pay your bills or use automated payments where you can that put your bill payments on autopilot.

2. Amounts owed (30%): Coming in at number two is the amount of money you already owe. When it comes to debt, lenders like to know whether you’ve bitten off more than you can chew. They look at something called your credit utilization ratio to get an idea of whether you’re overextended and might have a hard time making payments on new debt.

The credit utilization ratio measures how much of your available credit you’re actually using. In math terms, it divides your total balance by your total available credit. For example, say you have a credit card with a $10,000 credit limit and a balance of $5,000. You’re using half your available credit, so your credit utilization ratio is 50%.

What’s a good credit utilization ratio? While there is no hard and fast rule, it’s best to try to keep your ratio at 30% or lower. If you’re already above that level, don’t worry. You can bring your ratio down over time by focusing on paying down your balances or even better, paying off debt entirely.

If you’re thinking of closing some of your accounts, you’ll want to keep your credit utilization ratio in mind.

3. Credit history (15%): This factor considers how long your credit accounts have been open. In general, a longer credit history is better. That’s because a long credit history gives credit agencies a track record that shows how you’ve managed your debts over time. It also proves you can maintain satisfactory, long-term relationships with lenders.

4. New credit (10%): We’ve all been tempted by credit card offers promising low rates or fantastic rewards. And we’re often assured that applying for new cards is “free.” While that may be technically true, applying for new credit comes at a different kind of cost: it can negatively impact your credit score. Lenders’ logic goes something like this: if you’re actively taking on new credit, it may get harder for you to pay all of your bills on time which could leave you overextended.

Fortunately, this is an easy one to manage. Don’t jump at every credit card offer that comes along or apply for any unnecessary credit. Instead, focus on using the credit you already have wisely.

5. Credit mix (10%): Last but not least is credit mix—the types of credit accounts you have, which may include mortgages, credit cards, student loans, and auto loans. Having a diverse mix of credit can be good for your score, because it shows you can manage different types of debt at once.

If debt is a challenge for you at the moment, there’s no need to worry about adding to your credit mix now. Instead, focus on getting a handle on your existing debts and making timely payments. As your financial health improves, you can consider diversifying your credit mix gradually as needed.

What are the credit score ranges?

The credit score range for the FICO scoring model is 300 to 850. Here’s a breakdown of that range, based on the factors mentioned above.

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Exceptional: 800 to 850

Related: Review our posts about good credit scores for large purchases and credit repair tips.

What doesn’t impact your credit score?

Knowing what doesn’t impact your credit score can help keep you from stressing over the wrong things where credit scoring models are concerned.

Bank accounts – Your checking and savings account balances and activity don’t affect your credit score. Even if you overdraft, it won’t immediately show up on your credit reports. Many banks use a reporting agency called ChexSystems to track deposit activity, including unpaid negative balances and such. If you don’t pay back the overdraft and it goes to collections, it could also appear on your credit report.  

Tax liens and civil judgments – These have been removed from credit reports and no longer immediately impact your credit score anymore. However, they are still public records, so lenders might see them when you apply for credit. And, if turned over to collections, they would then appear on your credit report.

Income and personal data – Things like how much you make, your job history, your age, and whether you’re single or married don’t show up in a credit scoring model and don’t affect your credit score.

Utilities, phone bills and rent payments – Your monthly bills for things like electricity, water, gas, mobile service and rent generally don’t show up on a traditional credit report. 

However, there are alternative credit reporting companies which collect related payment information and compile alternative credit reports, which might or might not be used by a lender. In addition, there are third-party services that can add these payments to your traditional credit report if you want to boost your score by showing you pay these bills on time.

How Spruce can help you keep tabs on your credit score

Building and maintaining a good credit score is an ongoing process. Spruce lets you view your FICO® score^{Disclaimer number5. Go to disclaimer for more details.} any time, making it easy to keep tabs on your credit score and work on improving it. You can also take advantage of monthly updates and additional information about the factors that could be impacting your score.

Get started with Spruce today!

This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.