Credit Score FAQ, Part 2: How are Credit Scores Determined?

What Factors Are Used to Calculate a Credit Score?

To be right up front: the most important factor in determining a credit score is whether past or present credit has been or is being paid on-time. Late payment is the most common reason for low scores.

That being said, various companies that provide credit scores may have a specific set of factors used in their particular determinations. The following are very common among them:

• Uses of credit (What is it used for?)

• Payment history

• Debt level (usually as a ratio of amount of credit available)

• Age of credit

• Mix of types of credit

• Credit inquiries

• Length of credit history

How Are These Factors Used?

According to myFICO.com, FICO uses five of these factors and weights them according to the information in the overall credit report. For a general, or average, credit score the weights are:

The weight per factor changes according to an individual’s credit usage and history. Someone with a longer history will have these factors weighted differently than someone who is new to credit. And despite some popular beliefs, there are factors that do not have the impact most people think.

For instance, many think having too many credit accounts can hurt the score. The number of accounts is not what matters; it is whether the accounts are being paid on time. Another is that rich people have higher credit scores; wealthy or poor, it isn’t how much money a person has, it is whether or not credit accounts have been paid on time. Someone who always pays cash for everything can have a much worse score than someone with numerous credit accounts.

Opening new credit accounts does not necessarily impact a score unless several are opened at the same time. This may indicate a higher credit risk, especially for those with short credit histories. This is another good reason for new college students to bypass multiple credit card offers.

 As mentioned, different credit scoring companies can use differing factors from FICO or weight the factors differently. This means there is not a single “correct” credit score. There can be as many as 120 scores depending on the brand. Scores can also be customized to the type of loan requested, for example, a mortgage loan as opposed to a credit card.

What Factors Are NOT Used in Credit Scoring?

FICO does not use these factors for its calculations or decisions. Other brands may differ:

• Race, color, religion, national origin, age, marital status, or gender.

• Salary, occupation, date employed or employment history, title, or employer.

• Interest rates on other accounts, geography or housing type, family support obligations, or rental agreements.

• Anything NOT on a credit report.

• Information that has not been shown to predict financial behavior.

• The use of credit counseling.

Keep in mind that lenders and others may, indeed, use some of these factors in their decisions about credit-worthiness and interest rate offers, particularly those factors regarding salary and job history. Another common question is whether all credit inquiries impact the score. Consumer initiated, promotional, administrative, and employment related inquiries do not count. 

Things to Remember

1. Late payments have the most negative impact on a credit score.

2. Credit scores are branded; meaning the company providing them is a commercial company, not a government or other regulatory body.

3. Not all credit scores are the same.

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