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How Are Credit Scores Calculated?

Brent Wiblin, Senior Managing Director, First Republic Bank
December 16, 2021

  • Credit scores can be calculated using several models, which change over time, but are typically based on a few common factors, including payment history and credit utilization. 
  • Positive financial habits, such as paying bills on time, building up a long credit history and managing your credit balances may help borrowers maximize their scores.  

  • Borrowers checking their own credit may see a different score than lenders performing a credit check. 

The average U.S. FICO score reached 716 in 2021, up 13 points since October 2020. Considered a good — but not quite excellent — score, this reflects that the average American has become more responsible with their credit. 

This may leave you asking: how is a FICO score calculated, and how is your credit score calculated in general? Even if you have excellent credit, you may not know precisely why. This guide will explore the key factors that credit scoring models evaluate before generating your score, so you can better understand what a great score means. 

At a glance: Credit scores, not credit score

“Credit score” is a misnomer, as there are dozens of different credit scores. Scores are available from different brands, and each brand may offer various scores. Some commonly-used scores include FICO Score 8, VantageScore 3.0 and 4.0. 

Credit scores often differ slightly from each other, in part because they are often calculated using different formulas. Further, credit scores often vary because some models use information from different credit reports than others. The three major credit bureaus — Equifax, Experian and TransUnion — all generate credit reports. A credit score based on information pulled from one bureau may yield a slightly different score than one based on information from another, or one based on reports from a combination of bureaus.

Finally, the factors that go into calculating credit scores — or the importance of a factor in calculating the score — change over time, and new scoring models are released frequently. However, scores generally take into account the factors listed below. 

Payment history

Payment history is virtually always the most important factor in determining a credit score, regardless of the scoring model. Regularly missing or being significantly late on payments suggests a riskier borrower, while a prompt payment history signals that the borrower can dependably manage their debt. 

While you should always make your payments on time, borrowers generally have some wiggle room. Missed payments typically will not hurt credit scores until they’re at least 30 days late

How much payment history affects credit score:

  • FICO 8: 35%

  • VantageScore 3.0: 40%

  • VantageScore 4.0: 41%

Credit utilization (amounts owed)

Credit utilization is typically the second most important factor in a credit scoring formula and reflects how much of your credit you’re currently using. Those who usually maintain high balances on their credit cards, for instance, may have a slightly lower score than those who maintain a low (or no) balance due to the differences in credit utilization. 

How much credit utilization is ideal? Unfortunately, there is no universal guidance. Some experts suggest under 30% as ideal, while others point to 10% or even 1% as the goal. In general, 10% is a good rule of thumb.

How much credit utilization affects credit score:

Length of credit history

The length of your credit history also plays a smaller, but still significant, role in your score. Scoring models consider factors like the average age of your accounts, as well as the date your oldest account was opened. 

A long history of managing credit dependably suggests a responsible borrower, while a shorter credit history may yield a lower credit score until the borrower builds up a history of managing their credit. 

How much length of credit history affects credit score:

Credit variety

Credit scoring models also take into consideration the types of accounts that make up your credit profile. While credit variety is among the less important factors in determining your score, you may still benefit from successfully managing several different types of credit. 

A well-managed mix of credit — for example, some combination of a credit card, personal line of credit, mortgage, auto loan and student loan — may benefit your score more than managing one type of credit, such as a single personal loan or credit card. 

How much credit variety affects credit score:

Hard credit inquiries (applications for new credit)

Credit scoring models take into account recent applications for new credit, which may temporarily impact one’s score. When you apply for new accounts — for example, a new mortgage or credit card — your potential lender makes a hard credit inquiry, requesting a copy of your credit report with your authorization. 

Applications for new credit should not damage your score significantly, and their impact will lessen until they're removed from your credit report after 2 years. Further, shopping around for certain loans, like mortgages and car loans, should not lower your credit more than a single inquiry would, as long as you perform your rate shopping within a certain window — 45 days, in FICO’s case

How much hard credit inquiries affect credit score:

  • FICO 8: 10%

  • VantageScore 3.0: 5%

  • VantageScore 4.0: 11%

Soft credit checks — which may occur when you check your own credit report, or your employer or another third party performs a credit inquiry as part of a background check — do not impact your score. 

Other credit considerations 

While the factors above impact how credit scores are calculated, learning how other events might impact your credit helps you better understand your score.  

Situations that may affect your credit include:

  • Bankruptcies: Declaring bankruptcy significantly lowers your credit score and remains on your credit report for 7 to 10 years. 

  • Utility bills and other fixed expenses: These don’t typically contribute to your payment history. However, payments that are at least 30 days late may be reported to credit bureaus and impact your score.  

  • Tax liens and judgments: Though these used to impact your credit score, they no longer do. 

  • Wage garnishment: This does not impact your score directly. However, wage garnishment typically results from negative credit behavior, such as defaulting on a loan, which might lower your credit score. 

While understanding credit scores is an important part of financial wellness, keep in mind the scores you see when checking your own credit may not match what lenders see as they evaluate whether or not to approve you for a credit product. Lenders run credit reports that meet their specific needs, and they tend to use credit scores specifically designed for whatever type of credit product you’re applying for. 

Manage your credit carefully

Although different scoring models may result in a range of credit scores, borrowers looking to maximize their credit score should look to the above factors for guidance. Practicing good credit hygiene is an important part of prudent financial management. It's also a habit that may help optimize your scores over time. This includes paying bills on time, using a reasonable amount of credit, keeping the oldest accounts open, maintaining a mix of different types of credit and limiting hard credit inquires. 

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