How Your Credit Score is Calculated: What You Need to Know

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As I mentioned in a previous blog post, I'm considering applying for a new credit card, which led me to study up on the fine print on credit card offers. But before I dive deeper into the credit pool, I wanted to know how an additional card would affect my credit score. That's why I called up Craig Watts, Public Affairs Director at FICO, the folks who provide the formulas for calculating credit scores (yes, the FICO score, considered to be the most accurate). Here's what I learned from our chat.

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Credit score rules of thumb:

  • The primary time your credit score "matters" is when you make a request for more credit (such as applying for a credit card or a loan), or when you're entering into a contract for which your finances may be relevant (for example, when signing up for a cell phone plan or renting an apartment).
  • Credit scores range from 300 to 850. If you're on the high end, you're considered an "excellent credit risk," i.e., a lender can make a reasonable expectation that you'll use a credit card responsibly or pay back a loan reliably. The low end is the opposite. Scores in the 600s put you in the "maybe/maybe not" category in a lender's eyes, depending on the type and the size of the credit line or loan you're requesting.

How a credit score is calculated:

The formula is complicated (and guarded like a state secret), but here's a rough outline:

  • 35% = How reliably you've paid back your debts. Make at least the minimum payment on time every month, and you're golden. Late payments (or nonpayment!) will ding this portion.
  • 30% = How much you owe. This includes the sum of your loans plus your credit card balances. This can vary based on the time of month your credit is checked, even if you pay off your credit card in full every month. (If your credit score is checked before the bank reports your monthly payment, it will reflect a greater debt load.)
  • 15% = How long you've been managing credit. By definition, this builds over time, but, contrary to credit folklore according to Watts: Even if you close a credit card, the history remains on your report for about another 10 years. By that point, you'll have built up your credit history in other ways.
  • 10% = How recently or frequently you apply for new credit. Do it too often (by, say, signing up for every store card you're offered to get that initial discount), and this portion suffers.
  • 10% = Your mix of credit. Another one that largely changes with time, having a good variety (credit cards, store cards, mortgages, car loans) will up this portion. Just remember that your overall score relies more on how good you are at paying back all your debts!

For even more on what goes into it, check out FICO's extremely detailed explanation. Also, read our tips for improving your credit score.

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