Credit scoring systems such as the FICO® Score☉ and VantageScore® analyze credit report information to predict whether you'll pay your debts as agreed. The software essentially uses advanced algorithms to comb your credit history for signs of good (and bad) credit management habits.
The calculations that produce credit scores are closely kept trade secrets, but the underlying factors they consider (as well as how they're weighted) are public knowledge. The following factors and percentage weightings apply to the FICO® Score, which is used by 90% of top lenders.
VantageScore factors differ somewhat, but adopting the habits described below will promote improvement on any credit score derived from credit report data.
Factors That Determine Credit Scores
1. Payment History: 35%
Making debt payments on time every month benefits your credit scores more than any other single factor—and just one payment made 30 days late can do significant harm to your scores. An account sent to collections, a foreclosure or a bankruptcy can have even deeper, longer-lasting consequences. Payment history accounts for about 35% of your FICO® Score.
2. Amounts Owed: 30%
The total amount you've borrowed affects your credit score, as does the portion of your available credit tied up in outstanding balances. Your credit utilization ratio, or rate—the percentage of your total borrowing limit you're using on your credit cards and other revolving-credit accounts—is a significant factor in determining credit scores. It is also one of the factors that's most responsive to your actions. For instance, paying off a high-balance credit card one month can help you see a credit score boost once the payment is reported to the credit bureaus and a new score is calculated.
To calculate your utilization, divide your outstanding balance on each revolving account by its credit limit and multiply by 100 to express the answer as a percentage. Credit scoring systems consider the utilization rate on all accounts individually and on the total of all accounts, as in the following example:
|Credit Utilization Rate Example|
|Credit Limit||Balance||Utilization (Balance/Limit)|
|Credit card 1||$6,500||$1,600||25%|
|Credit card 2||$4,800||$1,500||31%|
|Credit card 3||$8,000||$1,300||16%|
Individuals with the highest credit scores tend to keep their utilization rates below about 10%, and utilization rates of roughly 30% or greater will more negatively impact credit scores. Paying down higher balances can bring relatively quick score improvement, so in this example, focusing on reducing the balance on card 2 could lead to a relatively quick increase in credit scores.
Amounts owed are responsible for about 30% of your FICO® Score.
3. Length of Credit History: 15%
It makes intuitive sense that experience with credit accounts will tend to make you better at managing debt, and that's borne out by statistical analysis. For that reason, all else being equal, the longer your credit history, the higher your credit score will tend to be. The FICO® Score evaluates your experience with credit by measuring the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts.
Note that closing accounts and paying off loans in full caps the payment history for those accounts, but it doesn't immediately cancel out their ages for purposes of calculating length of credit history. Accounts you choose to close in good standing (meaning with no late payments) remain on your credit report for as long as 10 years.
The length of your credit history accounts for about 15% of your FICO® Score.
4. Credit Mix: 10%
The ability to successfully manage multiple debts and different credit types tends to benefit your credit scores. Credit scoring systems favor a mixture of installment debt (such as student loans, mortgages, car loans and personal loans) and revolving accounts (credit cards and lines of credit). Credit mix comprises about 10% of your FICO® Score.
5. New Credit: 10%
It's a statistical fact that new debt raises the odds you'll fall behind on your old debts. Credit scoring systems, therefore, may ding your score a small amount in response to hard inquiries―entries that appear on your credit report when a lender processes a credit application from you. Your credit will usually decrease less than five points for an inquiry, and if you keep up with your bills, your score will typically rebound within a few months.
Hard inquiries are not all treated the same, however. Credit scoring models see rate shopping for the best rates and terms on installment loans such as mortgages, car loans and student loans as positive behavior. In these cases, they lump together hard inquiries on the same type of loan made within a short period of time (two weeks to be safe) and consider them as one inquiry. Note that hard inquiries made in relation to credit card applications don't get this same treatment: Each inquiry is considered separately, and can have a bigger impact if you apply for several cards in a short time span.
New credit is responsible for about 10% of your FICO® Score.
You can check your credit score in a variety of ways: through many financial institutions and credit card websites and apps, at websites that offer scores as part of free subscription services, or directly from the national credit bureaus. You can check your FICO® Score 8 based on Experian data for free as part of a free CreditWorks℠ Basic subscription from Experian.
Recurring payments to utilities and other services such as cable or cellphone are not traditionally included in credit reports. But if you share your payment history through the Experian Boost®ø program, these payments can benefit FICO® Scores based on Experian credit data.
The following actions can hurt your credit scores:
- Missing payments: Mentioned above, but well worth repeating: Even one payment made 30 days late or missed altogether can hurt credit scores significantly.
- Using too much of your available credit: Lenders may view high credit utilization as a sign of overdependence on credit. Utilization and overall debt account for 30% of your FICO® Score.
- Seeking a lot of credit in a short time: As noted above, each time a lender requests your credit reports for a lending decision, a hard inquiry is recorded in your credit file. With the important exception of rate shopping for installment loans, many credit inquiries around the same time can have a compounding effect on your credit score.
- Defaulting on accounts: Formally defined as going 90 days or longer without making a scheduled debt payment, a default is a major negative mark on your credit report and can lead to more severe consequences, such as foreclosure, repossession, charge-offs, settled accounts and even bankruptcy.
Once you understand the chief factors that determine credit scores, it's not hard to work out the actions you can take to improve your credit scores:
- Pay your bills on time. Do it every month, without fail, using any strategy for avoiding late payments that works for you.
- Pay down high balances. Reducing balances on credit cards and other revolving accounts can be one of the quickest ways to improve your credit scores.
- Review your credit reports and correct any inaccuracies. You have the right to dispute entries on your credit reports, including some that could be hurting your credit scores.
- Limit new credit applications. Credit scoring systems recognize the wisdom of shopping for the best terms on a car loan, mortgage or other installment loan, but multiple credit card applications can rack up hard inquiries that hurt your credit scores. If you want to compare credit card offers, consider the prequalification process, which gives you a good idea of the terms you can get without generating hard inquiries. You can find out which cards you may qualify for based on your unique credit profile with Experian CreditMatch™.
- Make up for missing payments. If you have any past-due payments, bring your accounts up to date to prevent further damage to your credit scores.
- Be patient. As your credit history lengthens, your credit scores will tend to improve, and time will diminish the ill effects any missteps may have had on your scores. So, if you adopt good habits and stay the course, you can see steady improvement in your credit scores.
What Can I Do if I Don't Have a Credit Score?
If you're new to personal credit, your lack of credit history may mean you cannot get a credit score, which can make it hard to qualify for the credit you need to get started with a credit history, and so on. Fortunately, there are several proven approaches that can help you break the cycle and establish a credit score, including:
- Get a secured credit card. A secured credit card works like a conventional credit card, but requires a security deposit—typically a couple hundred dollars—which usually serves as your credit limit. Making purchases with the card and paying your bill on time helps establish a credit report and score, and a positive payment history.
- Become an authorized user. If you are close with someone with a credit card (and, ideally, a good credit history), becoming an authorized user on their account could jump-start your credit history. Authorized users get cards in their own name and spending privileges on the main cardholder's account. Confirm that the card issuer reports authorized-user activity to the credit bureaus; if they do, you'll be eligible for a credit score of your own after about six months of card usage.
- Get a credit-builder loan. A credit-builder loan is a small loan, typically for less than $1,000, available from many credit unions and some banks. They are designed to help you save money and establish a payment history at the same time: You take out the loan, and the money you borrow is placed in a special savings account that earns interest but is off-limits to you until you pay off the loan (typically over a term of 12 months or less). If you fail to make payments, the lender keeps the loan amount, but if you pay off the loan, you will have amassed a bit of savings and established a positive payment record.
- Try Experian Boost. This free feature lets you share payment information on recurring expenses such as utility and cellphone bills and rent you pay online and have it reflected in your Experian credit report. Experian Boost can help you establish a credit report if you don't have one and improve credit scores based on Experian credit data.
The Bottom Line
Understanding the factors that go into credit scores can help you recognize the connections between your behaviors and your scores. While there are factors beyond your control (you can't instantly gain 10 more years of credit management experience, for instance), you can make choices today that affect your credit scores relatively quickly.
Adopting good credit habits that align with credit scoring factors and sticking to them over the long haul is the key to steady credit score improvement. To monitor your progress, you can sign up for free credit monitoring from Experian.
Learn More About What Affects Your Credit Score
- What’s the Most Important Factor of Your Credit Score?
The most important factor of your FICO Score is your payment history, which makes up 35% of your score. Here’s what other factors matter.
- What Is a Credit Utilization Rate?
Your credit utilization rate, sometimes called your credit utilization ratio, is the amount of revolving credit you're currently using divided by the total amount of revolving credit you have...
- How to Improve Your Payment History
Maintaining a clean payment history—or refurbishing a spotty one—can help you improve your credit scores and save you money.
- How Does Length of Credit History Affect Your Credit?
The length of your credit history can directly impact your credit scores, and this scoring factor is often misunderstood.