What Determines Your Credit Score?


Credit scores (and the credit reports they are generated from) are used by financial institutions to gauge how risky it is to lend money or open lines of credit to you. The details of your credit report, which include your loans, past payments, and credit cards, all factor into your score that is generated. So what actually influences your credit score? Understanding the specific components will help you learn how to improve it, and a better score will lead to lower loan interest rates and more long-term savings.

What is a “credit score”?

Your FICO credit score is a snapshot of your financial history, and as stated above, can be the primary factor between getting high or low interest rates. The three nationwide credit reporting agencies which track this history are Equifax, Experian, and TransUnion. When you apply for any type of credit (auto loans, credit cards, department store cards, mortgages, and sometimes even an apartment lease), the lenders quantify your financial risk by looking at your credit report from one or all of these agencies.

Your credit report, which summarizes your financial history, yields your credit score. Anytime this report is pulled by a lender, it is called a “hard inquiry” and will slightly affect your score. A “soft inquiry” such as you pulling your own score, does not appear on your report and, therefore, will not affect it.

How is your credit score determined?

The range for FICO scores is between 300 and 850. A score over 720 is generally considered good and a score over 760 is excellent. Some items on your credit report affect your overall score more than others. The exact formula which determines your score is proprietary information owned by the company FICO, but the general categories which make it up are public information and outlined below:


Payment history – 35%

The biggest component of your score is your past payment history. It’s simple: if you make your payments in full and on time, your score will reflect that positively. A single late payment may not be very harmful. Banks will usually excuse a late payment here or there. Making a habit of it, however, will impact your score more negatively. Accounts sent to collections or negative public records such as bankruptcy will be even more detrimental.

Amounts owed – 30%

Utilization above 50% of your credit limit (your balance divided by your credit limit) on a single account is usually considered negative because lenders worry that you may be using more credit than you can reasonably afford to repay. Generally, you want to have less than 30% utilization across all accounts and no single account above 50% . One credit score myth is that you need to carry a credit card balance to build good credit. This is false. Carrying a balance will only dig you deeper in a hole and cost you more in interest.

Many of us carry some student loan debt. This won’t necessarily put you into the high risk category though. High balances on credit accounts are a negative factor, but installment loans such as mortgages, student or car loans are seen as less risky.  Banks will use the proportion of the loan that is still unpaid to determine if you are able to take on new debts.

Length of credit history – 15%

This is usually where those in their twenties fall short because they are young and lack the financial history. Lenders get a better picture of your financial risk factors, the longer your credit history is.

New credit – 10%

Although inquiries are an unavoidable result of applying for credit, lenders dislike seeing too many inquiries within a short period of time because they cannot tell whether you are shopping for the best offer or desperately trying to obtain credit because of financial trouble. Credit applied for in the last 12 months will lower your score as will applying for multiple credit cards within a few months.

Note: Mortgage and auto loans applied for within the last 30 days will not appear on your score. This will allow you to safely shop for home or auto loans without fear of your credit score being hit while going from bank to bank.

Types of credit used – 10%

What types of credit do you have? Credit cards, installment loans, retail accounts, mortgages, and student loans will all impact this. Lenders want to see if you have experience with both revolving and installment type accounts or if your credit history has only been limited to one.

How to find your score

The Fair Credit Reporting Act requires each nationwide credit reporting company to provide you with a free copy of your report at your request once every twelve months. Annualcreditreport.com is a website set up by the three major credit bureaus from which you can get your free credit report.

Although it costs less than $10 for each score you request, there are several sites out there that offer them for free.  Mint.com updates your credit score several times a year at no charge.  Credit Karma also offers credit scores with no credit card required.

Since each agency compiles its own credit report of you, you have three credit scores to go along with them.  They should all be relatively close.  If one is drastically different, there’s a good chance there is an inaccuracy on your report which you need to fix.  A lender will generally only request one score and if it happens to be the worst of the three, you could end up paying more than you have to.  The simple fact that one of your scores could differ greatly from the others is reason enough why you should check your credit scores yearly with your reports.

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2 thoughts on “What Determines Your Credit Score?

  1. Simon Joseph March 11, 2015 / 7:29 AM

    Two notes on the “How to find your Score” section.

    First up, it might be worth emphasizing the difference between a credit REPORT (which you get for free once a year, from each of the three bureaus) that gives a full, detailed, month-by-month history of your credit transactions from birth, and a credit SCORE, which is what you’ve spent the rest of this article detailing.

    Second, to tie into your previous article, Discover IT, CapitalOne, and Barclaycard will provide a credit SCORE for free (all three use TransUnion’s numbers though). Discover IT has the score on each monthly statement, CapOne and Barclaycard must be requested through their websites.


    • Michael March 11, 2015 / 8:00 AM

      Thanks for the suggestions, Simon. I tried to make that distinction between report and score in my post. I might add some wording to make that a little more clear.
      I like that point about getting your score through certain cards too. It’s true that they usually only include one of the scores, but it is still useful information. I’ll definitely incorporate that point into future posts.


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