What Makes Up Your Credit Score?

Your credit score is one of the most important financial numbers you have. A credit score is a three digit number that can tell lenders how reliable of a borrower you are. 

Credit scores show whether or not you repay your debts on time and lenders use this information to determine how much you can borrow including other loan terms such as your interest rate.

Typically credit scores range from 300 to 850 and the higher your score, the better your chances are of getting a loan. VantageScore and FICO are two of the most popular credit scoring models. 

Continue reading to learn how your credit score is calculated and how to improve your score with time.

Highlights/Key Takeaways

• FICO credit scores are based on five factors: payment history, amounts owed, length of credit history, credit mix, and new credit. 
• VantageScore, another credit scoring model, uses slightly different criteria to calculate your credit score.
• Your credit score helps lenders determine how much to let you borrow and at what terms. 
• You have multiple credit scores and your score can vary based on the factors used to calculate it and how well you manage debt payments.

What Makes Up Your FICO Credit Score

The FICO credit scoring model is one that’s most commonly used by lenders. Credit scores have been around for a long time, but the FICO score was created in 1989 by the Fair Isaac Corporation. 

The idea behind this scoring model was to make credit reporting more fair for lenders and borrowers. There are several different FICO score versions ranging from FICO 2 to FICO 9.

Different lenders as well as each of the three major credit bureaus use different FICO versions. Currently, Equifax, Experian, and TransUnion are all using FICO Score 8 or 9 when reporting your credit score. 

Most mortgage lending companies use FICO Score versions 2, 4, or 5. Meanwhile, auto lenders tend to use FICO SCORE versions 2, 8, or 9.

With each FICO Score version, there are slight variations or updates made. For example, for FICO Score 9, medical collections are treated differently than other types of debt. Also, any 3rd-party collections (including medical) that have been paid off no longer have a negative impact.

Though there are slightly different versions, FICO scores are based on five key factors:

Payment History

Importance: 35%

What is It: Payment history is a record of how you have paid various accounts over the length of your credit history. This factor has the biggest impact on your credit score, since most people use credit to borrow money. 

Lenders often want to know the risk of lending to you. If you fail to make payments on your existing debts and bills that get reported to the three major credit bureaus, this can negatively impact your score. 

Some of the accounts that can directly impact your payment history include:

• Credit cards: Credit card companies report your payments to the three main credit bureaus each month. This is why credit cards can be an excellent tool to help you build credit so long as you’re making on-time payments. 
• Loans: Payment history for loans such as personal loans, mortgages, and auto loans will also appear on your credit report.
• Retail accounts: Some retail accounts such as store credit cards can also impact your credit. Retail accounts can be tricky to manage if you overspend and can’t afford to pay off your bill at the end of the month. 
• Accounts in collections: If you fail to make payments on an account, it could be sent to collections which negatively impacts your score. However, you can and should still continue paying on the debt even after it appears in collections since this can lessen the negative impact to your score.
• Bankruptcies: Bankruptcy is a legal process that helps people who can no longer afford to pay their debt either discharge it or set up a settlement repayment plan. Either way, bankruptcy can severely damage your credit and will appear on your credit report for seven to 10 years. Chapter 13 bankruptcy allows individuals with a regular income to get on a plan to pay off a portion of their debt as a settlement. Sticking to this payment plan can help rebuild your credit score with time.Tips: Making payments on-time helps build your credit score. Late payments can result in fees and also lower your score. Consider setting up automatic payments for credit cards, loans and other accounts to maintain a positive credit history. 

Amounts Owed

Importance: 30%

What is it: The total amount of debt you carry. Your credit score will be higher if you only keep a manageable amount owed on your accounts, usually not less than 30% of your borrowing limit. 

Lenders also look at existing debts you have before approving your application to tell if you can realistically afford to borrow more money. 

Here are the main factors that make up the amounts owed category used to calculate your credit score:

• Amounts owed on all of your accounts: The major credit bureaus will factor in the total amount owed on all your accounts and add up the balances for all credit cards, mortgages, personal loans, auto loans, etc.
• Amounts owed on different types of accounts: The amounts owed on each type of account will also be considered. 
• The number of accounts with balances: This includes the total number of accounts you have with balances. So if you have 10 separate student loans that you still owe, each of these balances will be factored in when determining your score. 
• Credit utilization: Your credit utilization is applied to revolving credit accounts such as a credit card. If you’re utilizing more than 30% of your credit limit each month, this can negatively impact your score. 
• How much you owe on installment loans compared to the original amount: If you have an installment loan, you may notice that your total amount owed increased which could negatively impact your score. The key is to pay down your installment loan over time to lower your credit utilization.

Tip: Try to keep your credit utilization below 30%. Set a budget for monthly spending for your revolving credit accounts, and try not to borrow the maximum amount that you get approved for. 

Length of Credit History

Importance: 15%

What is it: How long you have been actively using credit.

If you’ve just started establishing your credit, your length of credit history will be short but this only has a small impact on your credit score. 

Also, opening too many new accounts or closing your oldest accounts can limit your length of credit history even if you’ve been actively working on your credit over time. 

Some important credit history factors include:

• The age of your oldest account: This is the first credit account you opened.
• The age of your newest account: This is the most recent credit account you’ve opened.
• Average age of all accounts: This averages out the length of all your current open accounts.
• Age of specific credit accounts: This can include accounts like a specific loan or credit card:
• Time since specific accounts have been used: Sometimes, a credit card account may close automatically if you haven’t been using it which can impact your length of credit history. Also, if you have older inactive accounts, this could limit your length of credit history since you haven’t had any activity or established any recent payment history. 

Tip: Try to avoid closing your oldest accounts, even if you aren’t using them. Some accounts like personal loans or student loans will get paid off eventually and the accounts will close. 

Credit cards are a revolving account that you can keep open as long as you want. This is ideal if you’re trying to increase your length of credit history. 

Credit Mix 

Importance: 10%

What is it: The different types of credit you use. You can improve your credit score by having several types of accounts open as opposed to just one or two. 

Types of accounts that can be looked for in your credit mix include:

• Revolving accounts, such as credit cards or a home equity loan
• Installment accounts, such as a mortgage or student loans 

Tip: A good credit mix can help to boost your score. A thin credit profile can make it harder to increase your credit score. 

New Credit

Importance: 10%

What is it: When you apply for new credit, the lender may conduct a hard inquiry, causing a temporary drop in your score. 

FICO scores take into account inquiries from the past 12 months. 

This means after one year, hard inquiries won’t have an impact on your credit score and may not even show up on your report even more.

Tip: Opening many accounts in a short period of time can hurt your credit score. When possible, try to do a soft credit check when you’re shopping around for a loan or credit offer. Soft credit checks allow you to get prequalified for a loan and this does not show up as a hard inquiry on your credit report. 

What is a Good FICO Credit Score?

FICO scores range from 300 being the lowest to 850 being the highest or best score. 

Generally, anything over 700 is considered a good FICO score. If you have a lower score, you could still get approved for loans or credit cards, but you may not qualify for the best rates and terms. 

Below are the current FICO score rankings used to determine whether your score is good or needs improvement.  

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Exceptional: 800 to 850 

What Makes Up Your VantageScore Credit Score 

VantageScore is another leading credit scoring model and competitor to the FICO score. VantageScore was founded in 2006 by the three major credit bureaus, TransUnion, Experian, and Equifax. 

The VantageScore scoring model is able to score up to 96% of the U.S. population, and it’s used at 9 of the 10 largest banks. The most current VantageScore version is 4.0 was designed to assess consumer credit behavior over a period of time vs. just providing a snapshot of the current data. 

Similar to FICO scores, VantageScore also provides credit scores for auto loans, banking, and personal loans.  

VantageScore 4.0 calculates credit scores using the following criteria: 

Payment History

Importance: 41%

What is it: Similar to FICO, payment history is the biggest factor that impacts your credit score. But for VantageScore, the impact is even greater at 41%. 

Payment history includes how often you make on-time payments on your accounts. This includes monthly credit card payments, installment payments, student loan payments, and more. 

Tip: Late payments can stay on your credit report for seven years, but it typically takes about 30 days for a late payment to appear on your credit report. 

Try to consistently make on-time payments and always reach out to your credit if you are ever struggling to make payments. 

You never know if they have a relief option or will work with you to adjust your payment options so you can maintain a good credit score.

Depth of Credit

Importance: 20 %

What is it: Your depth of credit refers to the total length of your credit history. Similar to FICO, the VantageScore model favors people who have a longer credit history. 

This includes more history of positive payment history and older accounts that have been in good standing for some time. 

Tip: Lenders like to see longer credit history because it gives them a clearer picture into your financial history and repayment patterns. 

It’s great if you’ve been making on-time payments for maintaining your accounts for 12 months, but if you have five years of reliable credit history, this gives lenders more confidence that you can maintain healthy financial habits long-term. 

Credit Utilization 

Importance: 20% 

What is it: How much credit you use compared to how much you have access to. Keeping your total credit utilization at or below 30% of your credit limit is the same general rule of thumb that also applies to the VantageScore credit scoring model. 

This means, if you have a credit card with a $1,000 limit, you don’t want to have a balance that exceeds $300, or 30% of your total credit limit. 

It would be even better to keep your credit utilization at 20% or lower just to add in some cushion. This should apply to all your revolving credit accounts.

Tip: VantageScore focuses more on revolving credit than installment loans when looking at your credit utilization. So get into the habit of utilizing less of your revolving credit at all times. 

You may even be able to request a credit limit increase if you wish to be able to spend more. Try to do this after spending several months making on-time payments. 

Recent Credit 

Importance: 11%

What is it: How many accounts you have opened recently and the associated hard inquiries. It’s important not to open too many accounts around the same time because you could receive several hard inquiries. 

Hard inquiries can remain on your credit report for up to two years, but VantageScore considers hard inquiries to be less influential to your credit after just a few months. 

Tip: Many people shop around for credit, which can lead to several hard inquiries. VantageScore keeps that in mind; all hard inquiries that occur within two weeks are counted as just one. 

Balances

Importance: 6%

What is it: How much do you owe across all open accounts? The total amount of all your balances has much less impact with VantageScore than FICO. 

Tip: VantageScore looks at current and delinquent amounts owed. Focus on paying down delinquent accounts and high loan balances to improve your credit score. 

Available Credit 

Importance: 2%

What is it: How much credit do you have available on your revolving credit accounts? It’s never a good idea to max out all your available credit. 

When you use all your credit, your credit score will decrease and it also translates as risky behavior to lenders. 

Tip: You can get a small increase in your score if you have more available credit, but VantageScore gives this category the least amount of weight. 

If anything, you can try to keep balances low and increase your available credit to ease financial stress and avoid trying to pay too many bills each month. 

What is a Good VantageScore Credit Score?

A good VantageScore ranges from 661 to 780 but of course, the higher your credit score, the better. 

Low VantageScores are usually referred to as subprime and it becomes harder to qualify for a loan and get loan terms. 

Some lenders might cater to subprime borrowers but they tend to charge higher interest rates and more fees. As a result, a lower credit score will cost you more money in the long run. 

Below are the current VantageScore rankings used to determine whether your score is good or needs improvement. 

• Subprime: 300 to 600
• Near prime: 601 to 660
• Prime: 661 to 780
• Superprime: 781 to 850 

How Your Credit Score Is Calculated

Credit scores are calculated by the three major credit bureaus - Equifax, Experian, and TransUnion. 

Each credit bureau operates independently of one another and generates your credit report and score based on the information it receives. 

When you give your social security number to a lender for a loan or sign up for a credit card, those creditors report your payment and account history to the major credit bureaus. 

Your actual credit score can vary based on which credit scoring model a credit bureau is using along with which type of score a lender uses to run your credit. 

For example, a personal loan company may only look at your Experian credit score when you apply for a loan. If you are looking at your TransUnion credit score, you may see a different score entirely. 

Most people don’t realize that they can have multiple credit scores including a score for auto loans or mortgages. However, the scoring model used focuses on similar factors such as payment history, age of credit, credit mix, and overall credit utilization. 

Why Your Credit Score Is Important 

Your credit score is important because various lenders use credit scores to make lending decisions. 

Many lenders even have credit score requirements and won’t approve your application if your score falls below certain benchmarks. 

If you want to get a credit card, companies will consider your credit score for an unsecured card that has good terms. 

Having a higher credit score means you’ll not only get approved for certain loans and accounts but also that you’ll get a better interest rate. 

If you take mortgages for example, even a 1% difference in your interest rate could save you thousands of dollars over the life of your loan. 

A good credit score may also help you save on auto insurance premiums and could make a positive impression on landlords and employers. 

How To Improve Your Credit Score? 

Monitoring your credit score regularly is a great way to see where you stand. If you feel your credit needs improvement, there are several ways to increase your score. 

• Start by making payments on-time. This is one of the biggest factors that can impact your credit score. Set up automatic payments if you need to so you can improve your payment history and avoid costly late fees. 
• Consider a secured credit card. Secured credit cards have low limits and help you build your credit since payments get reported to the three major credit bureaus. You do need to make an initial down payment, usually $200 to $300, to serve as your credit limit. Then, you’ll borrow against this amount and once you’ve made several on-time payments, your card issuer may increase your limit or upgrade your account to an unsecured credit card.
• Credit builder loan. Credit builder loans help you borrow a small amount of debt to build a positive payment history as you repay it on-time. Some credit builder loans even allow you to make “payments” into a savings account. Then, when your repayment term is over, you’ll get all the money back.
• Manage your spending to keep utilization low. Aim to keep your spending below 30% of your credit limit with revolving credit accounts. Set a budget so you don’t overspend and practice delayed gratification to avoid impulse purchases. 
• Become an authorized credit card user. If you have a friend or relative who has great credit, they can add you as an authorized user to their account. As an authorized user, you’ll receive your own credit card through the primary cardholder’s account but it will still show up on your credit report. You can use this account to help improve your creditworthiness. 

Final Word

Many factors impact your credit score. Knowing how payment history, credit utilization, credit mix, credit age, and new credit impact your score, you’ll be able to make wise financial decisions to manage and improve your credit. 

Consider checking both your VantageScore and FICO score online before applying for any loans or credit cards. 

Practice building healthy financial habits that will translate into a strong credit score and better loan terms no matter what model is used.