Your credit score is one of the most important numbers in your financial life. It determines whether you qualify for a mortgage, the interest rate on your credit cards, your auto insurance premiums, and even whether a landlord will rent to you. Yet most people have only a vague understanding of how credit scores are actually calculated.
The Five FICO Score Factors
FICO scores, used by 90% of top lenders, are calculated from five categories of data in your credit report. Each factor carries a different weight in the overall calculation.
1. Payment History (35% of Your Score)
Payment history is the single most important factor in your credit score. Lenders want to know whether you have paid past credit accounts on time. This includes credit cards, retail accounts, installment loans, mortgage loans, and finance company accounts. Late payments, collections, bankruptcies, and other negative items all reduce your score. A single 30-day late payment can drop a good credit score by 60 to 110 points, depending on the overall strength of your credit profile.
The recency, frequency, and severity of late payments all matter. A late payment from six months ago hurts more than one from five years ago. Multiple late payments hurt more than a single occurrence. And a 90-day late payment is worse than a 30-day late payment.
2. Credit Utilization (30% of Your Score)
Credit utilization measures how much of your available credit you are currently using. Financial advisors and credit repair professionals recommend keeping your utilization below 30%, and ideally below 10%, for the best credit score impact. This applies both to individual cards and your total credit across all revolving accounts.
For example, if you have a credit card with a $10,000 limit and a $3,000 balance, your utilization on that card is 30%. Paying down balances is one of the fastest ways to improve your credit score, often producing results within a single billing cycle.
3. Length of Credit History (15% of Your Score)
A longer credit history generally produces a higher score, all else being equal. FICO considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. This is why credit monitoring services and financial planners recommend keeping older accounts open even if you no longer actively use them.
4. Credit Mix (10% of Your Score)
FICO scores consider the variety of credit accounts you have, including credit cards, retail accounts, installment loans, mortgage loans, and personal loans. Having experience with multiple types of credit demonstrates that you can manage different kinds of financial obligations. However, this does not mean you should open accounts you do not need just to improve your mix.
5. New Credit Inquiries (10% of Your Score)
Opening several new credit accounts in a short period represents greater risk, especially for people with short credit histories. Each hard inquiry from a credit application can lower your score by a few points. However, FICO treats multiple inquiries for mortgage, auto loan, and student loan applications as a single inquiry if they occur within a 14 to 45 day window, recognizing that consumers often rate-shop for these products.
What Is a Good Credit Score?
FICO scores range from 300 to 850. Generally, scores are categorized as follows: 300-579 is considered poor, 580-669 is fair, 670-739 is good, 740-799 is very good, and 800-850 is exceptional. A score of 740 or above typically qualifies you for the best interest rates on mortgages, personal loans, and credit cards.
Actionable Steps to Improve Your Score
The most impactful steps you can take to improve your credit score include paying all bills on time, reducing credit card balances below 30% utilization, avoiding opening unnecessary new accounts, keeping old accounts open to maintain credit history length, and regularly checking your credit report for errors through AnnualCreditReport.com.
Credit monitoring services can alert you to changes in your credit report, helping you catch errors or potential identity theft early. Many financial institutions and credit card companies now offer free credit score access as part of their services.