top of page

How Your Credit Score Is Calculated


FICO Scores are calculated by the credit bureaus through using several different pieces of information typically listed inside of your credit reports at an individual bureau basis. This data is grouped into five categories: your payment history (35%), the amounts you owe (30%), the length of your credit history (15%), new credit accounts (or inquiries) (10%) and the mix of credit you’ve created for yourself (10%).

Your FICO Scores combine both the positive and negative information that is in your credit report on a per bureau basis. The importance of these categories may vary from one person to another and should never be assumed but a little more on this below.

The Importance Of The Categories That Make Up Your Credit Score Varies By Each Individual Person

Your FICO Scores are unique, just like you. They are calculated based on the five categories referenced in this article, but for some people, the importance of these categories can be different. For example, scores for people who have not been using credit long will be calculated differently than those with a longer, more established credit history that's been built over time. Those that don’t like having a lot of open accounts and using a lot of credit as a habit, a lifestyle or just an all around way of life aren't out of "luck" by any means though. It's okay to have a lean credit profile with minimal accounts, it's healthy, and did I mention, it really is okay to have only 2 or 3 accounts reporting to your credit reports as long as those credit reports are shining the right light and not limiting your ability to maintain new types of credit and accounts as you may need to open those new types of credit and accounts (Car notes, home loans etc) - the way your credit reports read, and the way your scores are calculated will be different because you will have a unique to you credit report full of accounts and “listings” that make sense FOR YOU. It’s important to note - you don’t have to do what everyone else is doing, and don’t have to have 5-10 open accounts to have a healthy mix of credit. 2-3 accounts is USUALLY enough as long as you are showing that those accounts make sense for you, and are being used responsibly.

Credit Score & Application Truths: Lenders Don’t SOLELY look At The Information In Your Credit Report There Are Usually Other Deciding Factors

Your FICO Score is calculated only from the information in your credit report. However, lenders may look at many things when making a credit decision, such as your monthly and annual income, how long you have worked at your current place of employment or within your industry, and depending on the type of credit you are asking for there may be other questions and requirements that you may need to make (profit and loss statements if self employed or even freelance, 2 years of past tax returns, and beyond. We've even seen letters of recommendation and credibility requests be asked for. The point, is tht it's not ALWAYS just about your credit reports or even your scores when lender approval or rejections are coming into question - it's about the overall, big picture.

What Factors Make Up My Credit Score & How Is My Credit Score Really Calculated?

Payment History (35%)

The first thing any lender wants to know is whether you've paid at least your minimum payments on time. This helps a lender figure out the amount of risk it will take on when extending credit to you. This is the most important factor in a FICO Score as your payment history makes up a total of 35% of your credit score. The best way to avoid any dings to your credit score is therefore to make sure you are maintaining a positive payment history of ON TIME payments to all of your accounts.

Amounts Owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. Instead, keeping what is called your credit utilization ratio UNDER 30% of your total line of credit is the most important aspect in determining whether you are seen as high risk or crossing the line of what is seen as high risk to lenders.

While not an immediate disqualifier, we recommend if at all possible to pay down your balances utilizing what is called the debt snowball effect to ensure all of your cards are paid down to 10% of their total limits as you can. The easiest way to accomplish this is to take some “extra money” as you have it, and pay down your lowest balanced card to that 10% range, then take what you would have been paying towards that cards monthly payment (just go back to the minimum payment on the 1st card) and pay the 2nd account down to 10%, and keep repeating the process until all of your accounts are paid down to that first 10% mark, then repeat the process just a little bit more and take it down even further to 3%. If you’re maxed out on your cards - shoot for 30%, then 20%, then 10%, then 3%. Things aren’t so overwhelming this way, you’re still meeting the requirements for an under 30% utilization rate, and if you take the process and look at it like goals, it’ll actually make the process go a lot smoother with goals attached. Once you hit a goal - TREAT YOURSELF, responsibly. You’ve worked hard and sacrificed most likely to reach those goals and treating yourself on something you’ve really been wanting that’s realistic, and responsible will not hurt as long as it’s in your budget (and usually gives you a good reason to pull out the cards again and start using them with a little more awareness, and responsibility in use attached. Afterall - you don’t want to have accounts that you don’t use because that will harm your scores too. Just make sure you’re charging and using them responsibly and all will be okay.

Length Of Your Credit History (15%)

The length of time you’ve had, kept, and maintained your credit accounts is a factor in how your credit scores are calculated making up 15% of your credit scores.

Once you get to the 2 year mark on your oldest account, it’s all a piece of cake from there as long as you are showing responsible use, and maintaining your positive payment history of at least making the minimum payment (if you can pay more just never pay full balances off otherwise your credit scores will actually drop - we know - messed up, right? But it’s true)...

When Calculating Your FICO Scores Based Upon Your Credit History The Following Is What Is Taken Into Account Put Simply:

  • How long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts

  • How long specific credit accounts have been established

  • How long it has been since you used certain accounts

Mix Of Credit (10%)

FICO Scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. Don't worry, it's not necessary to have one of each and as we briefly discussed above there’s absolutely NO REASON for most people to have 5-10 accounts. 2-3 cards, a home loan, and a car note are average but the later two are only when it’s right for you, and makes sense. It’s NOT a requirement and anyone that tells you, you need 5 open accounts to qualify for a mortgage is LYING to you. You do not need that. 2-3 is the minimum for a home loan as an example if you are in the planning stages of buying a new home depending on the loan type you are trying for (3 is the safest number that doesn’t discount you from a conventional mortgage as an example). FHA only requires 2 open, positive accounts with a 2 year history but 3 accounts is ideal there as well based on the lenders we’ve worked and spoken with.

New Credit Accounts (10%)

Applying for new credit must be done strategically, and we’d recommend applying for new cards and accounts with PURPOSE attached. While many start their journey to new credit with secured credit cards, and that is perfectly fine; consumers will want to make sure that eventually those cards go unsecured to open themselves up to future higher limit accounts as the accounts season. From there every 6 months to a year once you’ve shown responsible use, and responsible payment history you will want to add another 1-2 accounts as they may be applicable - start with where you shop the most - get 1-2 store cards for holidays, treating yourself, and gift giving. Look into Care Credit to use at Walgreens, the chiropractor, the dentist, the vet, and various other places (as long as your providers accept care credit), and once you’ve met the standard applications and have a broad range of accounts, add in any specialty accounts like airline or travel cards to keep growing your base if you will use the accounts and they make sense for your life and lifestyle. You don’t need to go application crazy. In reality as stated in our mix of credit section above, all you really need is 2-3 open accounts that you will actually use.

In Conclusion: How Your FICO Scores Are Calculated.

In conclusion, your FICO Scores are calculated by the credit bureaus through using several different pieces of credit based information typically listed inside of your credit reports at an individual basis by each bureau. This data is grouped into five categories: your payment history (35%), the amounts you owe (30%), the length of your credit history (15%), new credit accounts (or inquiries) (10%) and the mix of credit you’ve created for yourself (10%).

By working to maintain a healthy credit profile, with low utilization, a positive repayment history, and responsible use - you’re well on your way to ensuring a healthy credit profile now that you know how your FICO scores are calculated.

2 views0 comments
bottom of page