Do You Know How Your Credit Score Is Calculated?

According to, there are in the neighborhood of 192 million card-carrying Americans out there, each of which bears the responsibility of using their credit and/or charge cards in a prudent manner. As we well know, the smarter you are with your credit usage, (usually) the higher your credit score. And the higher your credit score, the more of bargaining chips you have when it comes to lowering your interest rates, or being approved for loans, with lenders.

But do you really know what goes into your credit score, or how it’s even calculated? Are you even aware that there’s another popularly used credit score beyond the traditional FICO measure, developed by Fair Isaac Corporation? Today, we’ll look at how your credit score is calculated — at least based on what we know, since the precise formulas are close-guarded secrets — for FICO and VantageScore, the other primary credit score model.

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How your FICO credit score is calculated

Arguably the most popular credit score measure is the FICO score. It ranges from a low of 300 to a peak of 850, with anything above 700 generally considered good, and a score above 760 being excellent. Keep in mind that there’s some arbitrariness to these cutoffs that’ll depend on the lender.

Your FICO score takes into five factors, each of which has its respective weighting listed in parenthesis.

  • Payment history (35%): It should really come as no surprise to card-carrying Americans that the most important aspect to a good credit score under the FICO model is paying your bills on time. Making consistent, timely payments is easily the fastest way to boost a low credit score or maintain an already high score.
  • Credit utilization (30%): Lenders want to see that you understand how to prudently manage money that’s technically not yours. In setting parameters, lenders traditionally don’t want your aggregate credit usage — i.e., your total credit used expressed as a percentage of your credit available, across every credit account — to be higher than 30%. In some cases, your score might even take a hit if an individual credit card gets above a 30% utilization ratio.
  • Length of credit history (15%): Your credit report is like a roadmap for lenders. The more data points you can provide demonstrating that you’re a good consumer who can pay his or her bills on time, the more likely it is that lenders are going to be able to form a realistic picture about your spending and credit-usage habits.
  • New credit accounts (10%): Generally speaking, each time you open a new line of credit, or attempt to open an account, your credit score takes a temporary hit. That’s because it’s treated as a “hard inquiry” into your credit report. In order to avoid these short-term knocks against your score, you should only open credit accounts when it makes financial sense to do so.
  • Credit mix (10%): Lastly, your FICO score incorporates your ability to balance installment and revolving loans. An installment loan is the same each month, such as a mortgage or auto loan. Meanwhile, a revolving loan payment is based on how much you owe, such as with a department store credit card.

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The upside of the FICO score is that it’s been around for nearly 30 years and is highly trusted within the financial community.

If there is a downside, it’s that many established financial institutions treat FICO scores very rigidly. This means if your score is just below the threshold needed to obtain a loan or receive a lower interest rate, there’s little to nothing that major banks can do to assist you. Mind you, this doesn’t mean those with low FICO scores, or scores just below key point thresholds, are out of luck. It just means they may have to shop a bit more and take their business to a smaller or local lender.

It can also take a bit of time before your FICO score is available. Usually six months of credit history is needed before your initial FICO score is available.

How your VantageScore is calculated

The other credit score that’s grown in importance, but which you may not be as familiar with, is your VantageScore, which was developed by the three credit-reporting bureaus. VantageScore models 3.0 and 4.0 both use the traditional scoring model of 300 on the low end and 850 on the high end.

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According to a presentation given in 2013 of the VantageScore 3.0 model (most commercial banks have moved onto VantageScore 4.0 as of this past fall), here are the six factors that go into your score, along with their respective weightings in parenthesis.

  • Payment history (40%): If you thought making on-time payments was important with the FICO scoring model, it’s even more important with VantageScore. Approximately 40% of your score is entirely based on your ability to pay your bills on time. The more likely you are to do so, and the fewer late payments or other red flags you have on your credit report, the higher your score should be.
  • Credit age and mix (21%): This combination category combines two of FICO’s five core factors: the average length your credit accounts have been open, and the account mix you have, in terms of installment loans versus revolving loans. As with the FICO scoring model, the longer you’ve had your accounts open, the more of an accurate roadmap lenders can paint of your spending habits. On a combined basis, the 21% allotted to credit age and mix is a little bit lower than the combined 25% FICO allots for these categories.
  • Credit utilization (20%): Just as described with FICO, your credit utilization describes your total credit usage as a percentage of your aggregate credit available for all accounts. Keeping your usage below 30% as a whole, and perhaps for each and every credit account, is considered optimal. For VantageScore, credit utilization isn’t quite as important as it is with FICO.
  • Balances (11%): This figure examine all of your outstanding credit debt, including any delinquent debt you may have. Yes, it’s somewhat similar to the utilization ratio above. Generally, the more you reduce the total debt you owe lenders, the more this figure will work in your favor.
  • Recent credit applications (5%): Another similarity between the two scoring models is that they both examine recently opened accounts for hard inquiries. However, unlike FICO, there’s less of a hit to your score with the VantageScore model.
  • Available credit (3%): Lastly, the VantageScore model examines the amount of credit you have available to use, albeit the presentation given in 2013 suggests this is a very small component of your score. The assumption here is that you’re using some of your available credit, but again, not so much that it hurts your utilization

Image source: Getty Images.

One of the primary advantages of the VantageScore is that it can produce a score within one or two months of a consumer opening a credit account, according to NerdWallet. As noted, it takes FICO six months of credit history to generate a score. This makes VantageScore a particularly good measure for those folks with new credit, or people who rarely use their credit accounts. This is because VantageScore includes factors like rent, utility, cable, and phone payments, which FICO does not include. This gives it a more encompassing view of a consumer’s likelihood to pay bills on time.

As for downsides, though all late payments are bad news for your credit score, VantageScore pays particular attention to late mortgage payments. Also, when shopping for a home or auto loan, VantageScore only allows for a 14-day window for multiple credit inquiries to be treated as one, whereas FiCO allows 45 days. This could create some near-term credit-score headaches if using the VantageScore model.

The key takeaway here is that both models work sufficiently for lenders. It’s therefore important that you acquaint yourself with the factors that influence your credit score with FICO and VantageScore in order to keep the bargaining chip in your corner when dealing with lenders.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

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