How Your Credit Score is Determined: The Main Deciding Factors

Published On: August 9, 2021Categories: Credit Score & Debt Solutions

Since credit scores have an impact on major financial decisions such as buying a house, renting an apartment, buying or leasing a car and securing a loan or credit card, it’s only natural to be curious regarding how credit scores are determined and the factors considered during the calculation.

However, a significant amount of people are unsure how the process works. According to a recent survey conducted by LendingTree, nearly 4 in 10 American adults claim to be clueless regarding how credit scores work. Nevertheless, understanding the factors that affect your credit score can help you formulate a game plan to build and improve your credit. This article will cover the deciding factors that the two prominent scoring companies use to calculate your score.

What Are The Main Credit Score Factors?

Credit scores are determined by the information received from the three main credit bureaus—Equifax, Experian and TransUnion. However, you may have noticed that you have more than one credit score. That’s because there are two major scoring models, FICO and VantageScore. For the most part, both companies use the same data to calculate your score with a slight variance.

According to FICO, five factors go into your score. Here are the factors and the percentage break down based on importance:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New Credit (10%)

According to VantageScore, they use six factors when calculating credit scores, and the importance varies slightly from your FICO score. In addition, even though VantageScore recently came out with a 4.0 version, major credit reporting companies like Credit Karma still use VantageScore 3.0. Here are the factors that go into your VantageScore 3.0 calculation:

  • Payment history (40%)
  • Age and credit type (21%)
  • Credit Utilization (20%)
  • Total balances and debt (11%)
  • Recent credit behavior and inquiries (5%)
  • Available credit (3%)

FICO scores may be the most important score to know because FICO claims that 90% of the top lenders use FICO scores. However, that doesn’t mean VantageScore is not essential. They each have their benefits, and you should know how to strategize to increase your credit score with both models.

Additionally, FICO and VantageScore 3.0 use the same credit score ranges—300 to 850. Although, the standing may vary slightly.

Here is a general example of credit score standings and ranges:

Standing Range
Poor 300-579
Fair 580-669
Good 670-739
Very Good 740-799
Excellent 800-850

Payment History

Even though the weight of payment history varies slightly, FICO and VantageScore consider it the most influential factor when calculating credit scores. Payment history is regarded as the most critical factor because lenders use credit scores to predict how likely you are to pay back a loan and make consistent payments on time.

Payment history takes into account three aspects:

  • On-time payments: If you continually make payments to credit cards, mortgage loans, auto loans and retail accounts on time, it will positively reflect your credit score.
  • Late payments: While a few late payments here and there won’t derail your credit score, we recommend making all payments on time if possible. According to Equifax, late payments can stay on your credit report for up to seven years past the original delinquency date.
  • Public record and collection items: These types of things can have a severe negative impact on your credit score. Older items and those with smaller amounts will have less effect than more recent items with larger amounts. Some things that may be included are bankruptcies, wage attachments and lawsuits. Also, depending on the type of bankruptcy, it can stay on your credit report for seven to 10 years.

Amounts Owed And Credit Utilization

This is where FICO and VantageScore start to somewhat differ with their scoring models. Credit utilization is a subset of amounts owed. However, FICO believes amounts owed are the second most influential factor, while VantageScore believes credit utilization to be a close third behind age and credit type.

So, what exactly are amounts owed and credit utilization?

  • Amounts owed: This generally refers to how much total debt you carry. While having multiple credit accounts and owing money isn’t necessarily a bad thing, it can give lenders an idea that you may be overextended and at a higher risk of defaulting. However, the utilization of available credit might be the most important part of the amounts owed.
  • Credit Utilization: Commonly referred to as credit utilization rate or ratio, this relates to the amount of credit you use on revolving accounts compared to how much credit is available.

A credit utilization rate is calculated by taking your current credit card balance and dividing it by the card limit. For example, if you have a revolving credit card with a limit of $10,000 per month and you use $4,000, your credit utilization ratio is 40%.

While the example above was hypothetical, a consistent 40% credit utilization rate can hamper your chances of significantly increasing your credit score. Conversely, many financial experts agree that keeping your credit utilization rate between 10% and 30% will boost the chances of improving your credit score. Thus, a good rule of thumb to follow for credit utilization rate is—the lower, the better. However, not using any of your available credit can be damaging to your credit score.

If you are struggling to maintain a low credit utilization rate, here are a few strategies we recommend trying out:

  • Request a limit increase: If you’re consistently hovering over the 30% mark, requesting to increase your limit can help with the utilization rate.
  • Making extra payments: Making payments greater than the minimum per month can help lower the rate.
  • Setting up balance alerts: Getting a notification alerting you of your balance can help you stay on top of the utilization rate and plan ahead.

Length Of Credit History And Credit Type

VantageScore considers the age (length of credit history) and credit type to be their second most influential factor when calculating credit scores. While FICO considers the length of credit history to be their third most important factor, it’s a steep decline from their second most important factor. Nevertheless, the length of credit history plays a big part in your score calculation.

Age of credit history refers to how long your credit accounts have been open. This includes your oldest account, the age of your newest account and the average age of all your accounts.

Length of credit history is a critical factor because it can give lenders a good idea of your repayment tendencies. If you have a proven record of making consistent on-time payments, your chances of getting approved will increase.

Even though you may want to close accounts you no longer use, we recommend trying to keep those accounts open for as long as possible and make small payments every month. By doing so, you can help boost your credit score.

Credit Mix

Building a diverse credit profile may help increase your credit score. While FICO doesn’t deem a credit mix to be highly important, it’s still a factor considered in their scoring model. On the other hand, VantageScore doesn’t provide a specific percentage toward credit mix, but they claim it’s highly influential in their calculation.

Credit mix can offer lenders a general idea of how you manage multiple types of credit accounts over time.

There are two types of credit accounts where you can seek to diversify your credit profile—revolving accounts and installment accounts. Revolving accounts include credit cards, retail cards and lines of credit. In contrast, installment accounts include things such as auto loans, student loans and mortgages.

If you are looking to diversify your credit profile, you may want to check what types of accounts you already have and seek the other. However, you should only consider adding to your credit mix if you can handle the additional debt.

New Credit And Hard Inquiries

Recent or new credit and hard inquiries are pretty low on the credit score totem pole, but they are still considered during the calculation.

You should tread carefully when looking at opening new credit accounts. One reason is because of a hard inquiry. According to Equifax, hard inquiries are when a lender requests to review your credit report during the loan application process. When you apply for new credit, it will be marked on your credit report as a hard inquiry, and it may stay on your report for up to two years. However, it will only affect your credit score for one year.

Additionally, opening up too many new accounts rapidly can negatively affect your credit score. This is specifically important for individuals who are new to credit. Opening up various accounts in quick succession can bring down the average account age.

Lastly, don’t open up new credit accounts for the sake of building a credit mix. Only open new accounts if you believe you can shoulder the extra debt. If done correctly, new credit can provide a boost to your credit score.

Available Credit

VantageScore is the only major credit scoring system that states that available credit is one factor in their calculation. On the other hand, FICO implies available credit is part of their amounts owed section.

Available credit is the amount you have remaining on your credit card after you’ve made purchases. As long as you stay within the card’s limit and don’t “max out” the card, you would be considered in good standing regarding available credit.

This factor of VantageScore’s model can be closely compared to the credit utilization rate. The more you use the card, the less available credit you have and the worse your utilization rate gets.

Learn How You Can View Your Credit Report For Free With AZCCU

Credit scores can get tricky. Sometimes you see your score bump up or drop down from one month to another. And other times, your score stays stagnant for months on end. With a better understanding of the factors considered in the calculation of the score, you can better realize why your score is either moving up or down and strategize a plan to increase it.

An excellent place to start is to take a look at your credit report. AnnualCreditReport.com offers a free credit report every 12 months. In addition, we provide a free comprehensive credit reporting program through our SavvyMoney tool for members of Arizona Central Credit Union. The Savvy Money tool offers access to your credit score, complete credit report, personal finance education articles and much more.

To learn more about our Savvy Money tool or if you have any financial-related questions, contact us today. Our financial experts are happy to help you.

The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.