What Is a Credit Score, and How Is It Calculated?

If you’re navigating the maze of personal finance, there’s a good chance that you’ve run into the importance of your credit score.

You might also have wondered where those seemingly random, incredibly important three numbers come from. What does your credit score mean, and how do credit bureaus calculate a three-digit reflection of your entire financial story? 

Today, we’ll cut through the noise and untangle the mystery behind credit scores.

What is a credit score?

A credit score is a quick way for financial institutions to assess someone’s trustworthiness as a borrower. It’s a one-glance financial report card that helps people understand whether you’re diligent about paying bills on time and managing your existing credit wisely. 

Credit scores range from 300-850. The higher your credit score, the better. When you have a higher score, you’ll have an easier time getting loans and lower interest rates to fund big projects and life goals. 

So far, so good—but that doesn’t explain how your credit bureau arrived at your specific number. 

The factors fueling your credit: How is a credit score calculated? 

Many factors—ranging from your payment history to your credit utilization rate—influence your credit score. Some factors boost your score, and others may take it down a notch. 

Not all of these factors are weighed equally. There are companies out there that compile all of the above information about you before using credit scoring models to determine your credit score. 

The two prominent companies that do this, FICO and VantageScore, each have a slightly different scoring system. This means you may have a slightly different credit score at each. 

Let’s take a quick look at the priorities established by the two major scoring models.

The Ingredients of Your Credit Score

Deciphering your credit card score can feel like unearthing a secret recipe. 

Here are the main components that determine credit scores and how FICO and VantageScore weigh each component: 

1. Your Payment History

If you have a history of punctual bill payments, great—you’ll score more in this category. Any late payments could hurt your credit in this area.

FICO weighs payment history as 35% of your score. VantageScore’s system assigns it a weight of 41%, meaning that your overall payment history accounts for a little less than half of your credit score calculation. 

2. Your Credit Utilization

Keeping your balance-to-limit ratio across your cards at or below 30% will help you ensure healthy credit. FICO weighs credit utilization as 30% of your score, and VantageScore weighs it at 20%.

3. The Length of Your Credit History

Time tells a critical tale when it comes to credit. If you have long-standing credit accounts, that can indicate more experience with credit—and, possibly, more thoughtful use.

FICO weighs credit history length as 15% of your score, and VantageScore gives it a weight of 20%. This means credit history length isn’t as big of a deal as getting your payments in on time, but opening new credit accounts and decreasing the average age of your credit can have an effect on your score. 

4. The Types of Credit You've Used

Demonstrated experience with several types of credit can paint a picture of financial wisdom and experience. Having more diverse types of credit, from cards to mortgages, can boost your score.

FICO weighs types of credit used as 10% of your score; VantageGuard weighs the age and mix of your types of credit together at 20%.

5. The Credit Inquiries You've Accrued 

If a lot of different people or financial institutions are running checks on your credit, that can cause slight alarm for credit scoring models. For the most part, this is limited to “hard” inquiries, such as the types of formal credit checks that are included with loan applications. “Soft” inquiries, such as self-checks, shouldn’t reduce your score.

FICO weighs new credit checks as 10% of your score, while VantageScore weighs new credit at 11%. This isn’t as influential as payment history for either model, but it’s still worth keeping tabs on.

In addition to these five factors, VantageScore considers two extra ones: your credit balance (which it weighs at 6%) and your available credit (2%). This information can give VantageScore’s model extra details about your responsible credit use and overall financial acumen. 

One More Thing: Understanding Score Fluctuations

Your credit score isn't static—it’ll change in response to your financial behaviors and credit use patterns over time. 

This isn’t a bad thing. It’s expected. Seasonal factors, such as heavy holiday shopping, often come with temporary dips. 

Remember this: Establishing consistent financial habits can help you shape your credit score over the long term. Understanding the above credit score factors can help you determine the best way to move the needle for yourself and invest in habits that help you build a great credit score. Knowing how to check your credit score also helps. Check out this guide for more details.  

Need support navigating your unique financial landscape?

Understanding credit scores can be both tricky and overwhelming. And it can feel odd to see your entire nuanced financial history boiled down to three digits. 

At iQ, we understand that to you, your credit score is far more than just a number. We’re here to give you the tools and resources you need to build a bright financial future. Want to uncover more details about your credit and how to wield it well? Check out our must-read guide on developing healthy financial habits.