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What is a Credit Score and How is it Calculated?

By Steve Schmidt
VP/Director, Credit Management & Administration, ESL Federal Credit Union

One of life’s greatest mysteries seems to be how your credit score is calculated, especially when there are two major scores available that lenders may use to determine credit-worthiness: FICO® Score and VantageScore®.

Your credit score is often considered the most important three digits in your life. It determines not only approval for products such as credit cards, loans, and mortgages, but also impacts the interest rate you’ll pay for these products. A higher score will often mean lower rates, which translates to less interest paid, and vice a versa.

What is a FICO® Score?

The FICO® Score is currently the most commonly used credit score by lenders. FICO stands for “Fair, Isaac and Company” and is a data analytics company that introduced its scoring model to lenders in 1989. The score represents an individual’s credit history, ranges from 300 to 850, and is reported to the three major credit bureaus: Experian®, Equifax®, and TransUnion®.

What is a VantageScore®?

VantageScore® is the newer kid in town. It was introduced in 2006 and was developed by the three major credit bureaus. Like FICO, it ranges from 300 to 850 but while the factors that contribute to one’s score are the same, the impact each factor has on your VantageScore® differs from FICO®.

Credit Score Breakdown

Below is breakdown of what makes up a FICO® Score and VantageScore®, and best practices on how to keep your score in the higher ranges (sources: FICO® Score and VantageScore® websites):

FICO® Score Breakdown

FICO® Score Breakdown
% of Score Components
35% Payment History
30% Amount Owed
15% Length of Credit History
10% Credit Mix
10% New Credit

VantageScore® Breakdown

Influence on Score Components
Extremely Influential Payment History
Highly Influential Age & Type of Credit
Percent of Credit Limit Use
Moderately Influential Total Balances & Debt
Less Influential Recent Credit Behavior
Available Credit

Credit Score Components

1. Payment History

  • FICO® Score: 35%
  • VantageScore®: Extremely Influential

Best Practices: FICO® and VantageScore® both consider this to be the most important factor when calculating their scores. It tracks repayment behavior of whether payments are current, late, or charged-off. Making payments on time is the most important action you can take to build healthy scores. Late or missed payments (30-days past due, or longer), and other negative factors such as bankruptcies and foreclosures, all have a significant negative impact on your score, and can stay on your credit report for years.

2. Amount Owed/Percent of Credit Limit Used & Total Balances & Debt

  • FICO® Score — Amount Owed: 30%
  • VantageScore® —Percent of Credit Limit Used: Highly Influential
  • VantageScore® —Total Balances & Debt: Moderately Influential

Best Practices: “Credit utilization” is the amount you owe on your accounts versus the amount of credit available. Having a low credit utilization ratio (below 30%) helps both scores, as a high ratio may mean you’ll have trouble making payments in the future. As an example, if you have $1,000 of available credit, then it would be best to keep the amount of revolving credit under $300, unless you pay your bill in full every month.

3. Length of Credit History & Credit Mix /Age and Type of Credit

  • FICO® Score — Length of Credit History: 15%
  • FICO® Score — Credit Mix: 10%
  • VantageScore® — Age and Type of Credit: Highly Influential

Best Practices: This portion of your score is based on how long you’ve had credit, the age of your oldest and newest accounts, and how long specific accounts have been open. With Credit Mix and Type of Credit, both FICO® and VantageScore® are looking for a healthy mix of credit accounts (cards, auto, mortgage, etc.).

4. New Credit/Recent Credit Behavior & Available Credit

  • FICO® Score — New Credit: 10%
  • VantageScore® — Recent Credit Behavior: Less Influential
  • VantageScore® — Available Credit: Less Influential

Best Practices: Opening new credit accounts can have a short-term negative impact on your FICO® Score and VantageScore®, meaning that you don’t want to open a lot of new accounts all at once. A couple things to keep in mind: multiple credit report inquiries in a short period of time—such as when you’re shopping for a mortgage or auto loan—are often treated as single inquiries. And soft inquiries, when you pull your own credit report or new employer pulls your credit report, do not have an impact on your score.

Knowing the components of your credit score is vital to properly manage your credit and financial health. With two major scores used to track your credit worthiness, it becomes important to understand the differences and how certain actions you take can impact each score.

Final Tip

One final, important tip: make sure to pull your credit report at least annually to make sure that it is accurate. There are a number of sites available that allow you to do this for free or pay a small fee. Remember that pulling your report doesn’t hurt your score, and being knowledgeable about your credit history is always a smart best practice.