How Are Credit Scores Figured


FICO’s 5 factors: The components of a credit score

By Brady Porche

Brady Porche
Managing Editor
Personal finance journalist with an eye for industry news


FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. According to the company’s website, 90 percent of all lending decisions in the U.S. use FICO scores, and more than 27 million scores are sold each day.

So how is your FICO score calculated?

While the inner workings of the FICO scoring system are a closely guarded secret, the company is open about the general components of a FICO credit score. Using the information in a borrower’s credit report, FICO breaks that information into categories. Those five components each get different weights.

Here’s a breakdown of the five elements of the FICO score:

1. Payment history

Your payment history comprises 35 percent of the total credit score and the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior.

FICO keeps an eye on both revolving loans – such as credit cards – and installment loans, such as mortgages or student loans.

“FICO scores consider the frequency, recency and severity of reported missed payments,” said Tommy Lee, principal scientist at FICO. “Generally speaking, FICO scores do not consider missing a loan payment as more negative than missing a credit card payment.”

One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments.

2. Credit utilization

Credit utilization – the percentage of available credit that has been borrowed – makes up 30 percent of your total credit score.

Since FICO views borrowers who habitually max out credit cards – or who get very close to their credit limits – as people who cannot handle debt responsibly, a borrower should maintain low credit card balances. FICO says people with the best scores tend to have an average credit utilization ratio of less than 6 percent, with three accounts carrying balances and less than $3,000 owed on revolving accounts.

There’s no benchmark credit utilization ratio above zero that will maximize your credit score – not even the oft-cited “30-percent rule,” Lee said. Credit utilization is measured individually by card and also across multiple cards.

As you see, the first two factors make up nearly two-thirds of your score. So, if you pay your bills on time and don’t carry big balances, you’re two-thirds of the way toward a good credit score. The final credit score pieces can move you from a good score to a great one.

3. Length of credit history

Length of credit history – the length of time each account has been open and the length of time since the account’s most recent action – is 15 percent of your total credit score.

It’s impossible for a person who is new to credit to have a perfect credit score, but it doesn’t necessarily take long to achieve a high score. A longer credit history provides more information and offers a better picture of long-term financial behavior. Therefore, to improve their credit scores, individuals without a credit history should begin using credit, and those with credit should maintain long-standing accounts.

“Those who don’t have a long credit history can still have an excellent FICO score if they have no missed payments and low utilization ratios,” Lee said.

4 and 5. New credit and credit mix

New credit and credit mix each comprises 10 percent of your total FICO credit score.

Even those new to credit should avoid opening too many credit lines at the same time, since such behavior could suggest they are in financial trouble by needing significant access to lots of credit.

“We encourage consumers to apply for and open new credit accounts only as needed,” Lee said. “New accounts will lower your average account age, which will have a larger effect on your FICO scores if you don’t have a lot of other credit information.”

Credit mix, meanwhile, is somewhat of a vague category, but experts say that repaying a variety of debt products indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.

“People with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly,” Lee said. “Having credit cards and installment loans with a good credit history will help your FICO scores.”

Knowing the various weights given to components of a FICO credit score gives borrowers a better idea where to focus their attention.

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