How is Your Credit Score Determined?

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Your credit score is one of the most important numbers in your daily life. Credit scores are used for loan approvals, determining interest and insurance rates, when screening for employment and rental applications, and even determining eligibility for cell phone contracts. But not everyone knows how credit scores are determined – and this is important…

Your credit score is one of the most important numbers in your daily life. Credit scores are used for loan approvals, determining interest and insurance rates, when screening for employment and rental applications, and even determining eligibility for cell phone contracts. But not everyone knows how credit scores are determined – and this is important to know.

One place to get this answer is to the myFICO website, which is a division of Fair Isaac, the company that created the FICO credit score. The FICO credit score is considered the benchmark credit score, as over 90% of banks use FICO credit scores when pulling a customer’s credit score. You can get a copy Free FICO Credit Score from each of the credit bureaus.

How Your Credit Score is Calculated

Your credit score is comprised of many different factors from your credit report, each of which has a different weight. The better your credit history, the better your credit score.

The following chart breaks down the FICO credit score, which is one of the more popular credit scoring models used by lenders.

This chart breaks down the components of your FICO score.

How is Your Credit Score Determined

Payment History – 35%

Your payment history is the largest component of your credit score. Lenders want to know your past performance for paying off your loans. Lenders are interested in the type of loan you had, such as a credit card, mortgage, installment loan (a loan with a fixed number of payments, like a car payment), consumer finance account (generally considered a lower tier type of loan made by companies who generally lend to higher risk individuals), etc. Lenders are particularly interested in these other factors as well:

  • Number of accounts fully paid per agreement with the lenders.
  • Bankruptcies, judgments, lawsuits, liens, wage garnishments, delinquencies, bills that have gone into collection, or other negative signs that you may be a credit risk.
  • How long overdue you were on your payments.
  • How much you were past due on your bills or collections.
  • How recent these delinquencies or negative marks occurred.
  • Number of past due items on file.

Amounts Owed – 30%

In addition to the types of loans and your payment history, lenders are concerned with how much money you owe. Even if you have a perfect credit record, there is a limit at which lenders will probably not lend you any more money – simply because your debt to income ratio doesn’t support lending any more money to you. These factors are considered for your FICO score:

  • Amount owed on all accounts
  • Amount owed on specific types of accounts (secured vs. unsecured, etc.)
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits)
  • Proportion of installment loan amounts still owed (remaining balance vs. original loan amount)
  • Lack of a specific type of balance, in some cases

Length of Credit History – 15%

Lenders prefer lending to people who have consistently shown they can handle credit in the past. Chances are they will be able to handle making payments in the future. Some of the factors that make up your FICO score are:

  • Time since all accounts opened
  • Time since account opened, by specific type of account
  • Time since account activity

New Credit – 10%

New credit refers to how much credit you have taken out recently. Lenders may become concerned if you have recently applied for thousands of dollars in loans and continue to request more lines of credit.

  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems

Types of Credit Used – 10%

There are many types of credit on your report.  The most common types of credit include credit cards, retail credit accounts, mortgages, installment loans, and consumer finance accounts.

In addition to the types of credit, your FICO score will also encompass the number of each type of credit, how often they are used, and any recent information for them.

Additional factors affecting your credit scores:

It is important to remember your FICO score takes all of these factors into account, not just some of them. Your credit score will take into account both the positive and the negative information from your credit report. However, it is possible to raise your FICO credit score over time by establishing a good track record.

Note: If you have only recently established credit, your weighting may be slightly different because you have no established credit history.

Lenders look at more than just your FICO score. Your FICO score is only comprised from information found within your credit report. Lenders, however, look at many factors when making a lending decision, including income, current employment situation, type of credit being applied for, and more.

Keep your credit score high. Your credit score can have a big effect on your life. Having a good credit score is important.

Related Post: How to Improve Your Credit Score – 7 Easy Steps to a Better Credit Score

How Do Negative Items Impact Your Credit Report?

Your credit report and credit score should be a couple of your most prized financial assets. A solid credit history without any negative marks can save you hundreds of thousands of dollars in interest over your lifetime. Likewise, a few negative marks on your report can drop your score which in turn raises the cost of financing across all products like credit cards and home mortgages. With enough negative items on your report you can even be denied a loan completely.

Have you looked through your credit report online lately?

As important as your credit report is, sometimes life happens and we slip up. It might be a little ding on your report from a late payment or something more serious like several missed payments and an account that has been charged off. These mistakes can be costly in the long run.

Considering how important your credit report is to your ability to acquire loans in the future, it is important to know how long these negative items will stay on your credit report. Will your payment that was two days late end up ruining your credit history forever? Will the account that has been charged off keep you from becoming a homeowner? Let’s find out.

How Long Do Negative Items Stay on Credit Reports?

Let’s start with the bad news first. Most of the negative items on your credit report will be on the report for seven years from when they first were reported.

That means a negative item that is first reported today will be on your credit report for seven years.

What types of negative items are there for your credit report? All are varying levels of your inability to pay your debts on time:

  • Late payments (you paid, just not on time)
  • Short sales (you repaid some of the loan, but the bank had to write off some of what you owed)
  • Foreclosures (the bank writes off the full unpaid balance of the mortgage)
  • Bankruptcies (all of your creditors wrote off all of your debt; these last seven years if Chapter 13 and 10 years if Chapter 7)
  • Collections (a creditor sold off your debt to another company that tried to get you to pay)

All of these items, except in limited circumstances, will be on your report for seven years. This is why the best credit repair is prevention!

The Impact of Negative Items on Credit Report Over Time

While the negative marks on your credit history will stay there for seven years, they won’t pull down your credit score the exact same amount every single year.

A late payment today is significantly worse for your credit history and credit score than one from six years ago.

Additionally, the impact of negative items on your credit score isn’t as simple as plugging in the number of negative marks into a calculator and deducting points. Other positive and negative factors on your report can change how much or little your score is impacted by a negative item.

In short, having one slip up with a late payment won’t destroy your credit. Having other positive factors can mitigate some of the damage away. Likewise, piling up negative item after negative item can show creditors you cannot handle your financial obligations and really damage your score.

Related Posts:
What is a credit freeze?
Hard Credit Check vs. Soft Credit Check
Preventing Identity Theft for Your Children
What Credit Score Do You Need to Refinance a Mortgage?
The Debt Snowball Method for Reducing Debt
Can Authorized Users on Credit Cards Build Credit?
Buying a Car with Not-So-Great Credit
How Closing a Credit Card May Affect Your Credit Score

Have you found negative items affecting your credit score? What are some ways you made up for that disadvantage? Leave a comment!

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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  1. Dividend Growth Investor says

    An article from BankRate says that “each time you open a store credit card, 20 points are taken off of your credit score”.

    Some other articles claim this reduction to be 5 points per new store card opened.

    This article brings in a different view to the whole mystery how opening new credit cards affect your credit. “For example, if your scores are lower by just 10 points your interest rate can jump from 6.58% to 7.39%. On a $275,000, 30 year mortgage that is a difference of $150 each month. $1,800 each year. Saving 10% on those golf clubs suddenly doesn’t seem like such a great idea any longer does it?”

  2. [email protected] says

    Great job doing the research for this post. This is some great information for people to use.

    Another factor to consider is that different lenders may weight different things in your credit report. Paying your mortgage on time (or early) will be weighted more heavily by a mortgage company whereas GMAC will weight your car loans more heavily. They tweak it in subtle ways to try and glean just a little edge.

    It all boils down to “pay your bills on time!”

  3. MelStar says

    Great information. I just did a similiar post on my site maybe three or four days ago. Got my
    information from the same site.

    You covered it more extensively. Awesome job!!!! People definitely need this info, because once they know how their credit score is determined they can take the necessary steps to improve it.

  4. MoneyEnergy says

    Another important point or two is that

    1) you’re allowed to get a free copy of your credit report once a year (order it from their sites) and

    2) check this report to make sure the info is correct. Really. There were some serious errors on mine, including my employer and address – one hadn’t been updated in 10 years and the other was just wrong.

  5. Sabrina Young says

    Over 80% of credit reports contain errors, and 25% contain errors significant enough to deny the person credit. MoneyEnergy is right. Check your credit report regularly.

  6. Andrew says

    Found an interesting oddity on my credit report once. I opened a store-branded charge (not credit) card when I was in college, about 11 years ago. I had stopped using, but never actually closed, the account. The store has since gone bankrupt, but the charge card still shows as an open account on my credit report. It seems that this is one of those no harm situations, based on what you’ve shared, although there has been zero activity on the account for about 9 years. I once tried to figure out who I could contact to close the account, but ran into a bunch of dead ends.

    Any thoughts on what action, if any, I should take? Is it helping, hurting, neutral?

  7. Jeff Clair says

    Great job Ryan!

    Your post revealed the truth about credit score as this information will help to maintain a high credit score. Thanks for the valuable post.

    Jeff Clair

  8. Ryan says


    The account is helping you because it helps your average age of credit. The older the average age of your accounts, the better. It also helps your credit utilization rate because you have that amount of credit that you are not (and will not use).

    The only way it could hurt you is the type of credit it is – a store branded charge account. These are generally labeled as consumer finance accounts, which tend to have a lower rating than regular credit cards or secured loans like a mortgage or car note.

    But, I’m not sure it’s going to be a big deal for your credit score. I would think that overall it is more toward neutral, but I’m not 100% on that.

  9. Vishal says

    Question for you.

    If I have a Credit Card with a credit limit > $10,000, but have used it sparingly over the past couple of years (say, not more than $200 annually with punctual payments), does that affect my credit score negatively ?

    Thanks !

  10. Ryan says

    Hello Vishal,

    Your score is based on many factors, such as payment history, amounts owed vs. amount of credit available (credit utilization), age of credit history, new credit, and type of credit.

    It seems like you make all your payments on time, which means your payment history should be good. You don’t use much of your available credit, which means your utilization is low, and you’ve had your card for a few years, which means your history is established.

    I think the fairly high limit is fine as long as you aren’t looking to take out additional large lines of credit. In fact, a higher limit can help your score because it keeps your utilization lower. Based on limited info, your situation shouldn’t affect your score negatively.

  11. pat says

    To keep your credit score high is it necessary to have some type of loan payment.
    I have heard that paying in cash and carrying no debt can actually hurt your credit score. Is this true? Our credit score last March was 810. I don’t want to loose the good rating. I am contemplating taking out a loan to have the inside of our home painted just to keep our credit history alive. We have the funds to pay for it in cash, but I hate the thought of paying interest to some one.
    We have had no car payments for the last 11 years. Our mortgage has been paid off for 1 1/2 years. We paid off our 15 yr mortgage in about 9 yrs. We have 3 credit cards and pay the balance off every month “if” used. The oldest credit card was established in 1994. We pay ALL bills on time (early). I am 53 years old. I don’t want to end up with a bad credit rating as I age because I want to pay in cash. We have always kept our debt low. In fact, because of lack of credit in our 20/30’s we had some difficulty getting credit. I recently recieved a letter from Master Card reducing our limit by $2000 dollars to refect more of our spending habits. I took this as a negative blow to our credit status.
    Your thoughts on this subject.

    • Ryan says

      Pat, Many credit card companies are lowering credit limits right now as they are trying to reign in the amount of credit they have extended to people. This is more or less happening across the board, so you shouldn’t take it as a sign against you.

      Being debt free is a wonderful position to be in, and I would do my best to stay that way. I don’t think it will hurt you if you continue using your credit cards and paying them off every month. As long as you continue having them, they should work favorably on your credit report.

      If you are concerned about your score dropping, then check it once a year or so just to make sure it isn’t changing. You should also periodically check your credit report to verify accuracy.

      Best of luck!

  12. Grace says

    I have obtained the score of each of the three bureaus: Equifax, Experian, and TransUnion. Each of them gives me a difference score. Which one is the FICO score? Is it the average of the three scores? Thank you.

    • Ryan says

      Grace, The FICO score is a proprietary algorithm known only to the FICO credit company (it is also the most commonly used by lenders, but not the only credit score used by lenders; some may use other scores).

      If you need a loan in the near future and feel the need to know your FICO score, then you can go to the myFICO website and buy a copy of your credit score from them – the cost is usually around $15, but be sure to only purchase a one time score if that is the only information you are seeking (some credit score companies offer a credit monitoring service which is a monthly fee; these can be a good service, but only if it is something you feel like you want or need).

      If you don’t need a true FICO score in the near future, then you should be fine with the credit scores you have from the three bureaus, with the understanding that your FICO score will be somewhere in the area of the three scores you received.

      This is also a good time to review your credit reports from each of the bureaus to ensure the information they contain is accurate.

  13. Grace says

    I did go to myFICO website and got the score of 784 and it says Equifax FICO score. Is this a fair representative of all three scores?

    • Ryan says

      Yes, it should be a fair representation of your credit score. The numbers may vary slightly depending on which bureau’s information is used, but the numbers should generally be close. If there is a large difference in any one bureau then it would be a good idea to look into your credit report worth that bureau to see if any of the information thy have on file is bad.

  14. Jim says

    Who needs Credit Scores if you don’t get loans?

    We should all vow to stop using banks, money and credit altogether and switch back to the barter system. Oh that’s right, I forgot people don’t want the economy to improve.

  15. i .modak says

    i dont know how many people are in my situation but feedback on this question will be appreciated….

    i owed $150 on a capital one credit card and got a job offer out side the usa which i accepted, while i tried to pay that off online but the system in place wouldnt let me log in from outside the us, i emailed the bank so many times but no reply, now since i have come back i have a very low credit rating which disqualifies me even for a car loan, before this all my credit cards were fully paid for, they gave my details to debt collectors which ruined my credit,,,,

    one thing i cant understand is i had $6000 on my credit card and i only had only $150 unpaid, if they thought that i had run away with the money then i would have taken the whole amount rather than just $150, i have cleared all my dues but my credit is just nullified, cant get loan for anything— what do people do in such situations–so frustrating…

  16. Kayla says

    My husband has a credit score of 784, I have a credit score of 663. We were recently offered a credit card from our bank with a $1700 limit. Currently neither of us has a credit card, though we do have established credit through student loans, and he is an authorized user on his parents target visa card. We do not need the credit card, but were told by some that having one would positively impact our credit scores, though I have also heard that they can negatively affect your score. We are wanting to take out a mortgage within the next 9 months and do want to ensure our scores are as high as possible. Would you recommend getting the card?

    • Ryan Guina says

      Kayla, there are a lot of factors which go into applying for a mortgage, including your credit score, credit history, income, debt to income ratio, how much you are financing, and more. It is very difficult for anyone to tell you exactly how getting a credit card will affect your score in regard to being able to get a mortgage. In general, getting a new credit card will give you a small hit on your credit score until you can show you are handling it well, and establish some history with it. Then you will likely gain the few points you lost back, and then your score should begin to climb. This is assuming you make all payments on time, don’t have a large limit on the card, and don’t spend the entire balance at once (credit utilization is how much of your available credit you are using). Your husband has a great credit score, so a credit card shouldn’t affect his score much in either direction. Your score could use some improvement before applying for a mortgage, so make sure that if you get a credit card, that it is in your name as well, and that it reports to the credit bureaus in your name so you can gain the benefits of increasing your credit score. Best of luck!

  17. Mary says

    Ryan –
    I am a landlord and have a tenant who is two months behind on rent, has not paid the water bill and has had her vehicle repossesed. The tenant has given us a check for one month’s rent, but it was returned due to insufficient funds.
    We have started the eviction process, but want to know how (if possible) to get the non-paid monthly rent to show up on her credit score.
    Thank you for any input that you can provide. Mary

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