How Your Credit Score is Calculated

Credit score is probably a topic you hear about all the time.

You likely understand the basics of how your credit score works: You pay off your debts on time and your credit score goes up, right? Not exactly.

Let’s discuss how you really get a good credit score and how the system works so you can make it work for you.


What is FICO® and how does it know my credit score?

FICO is a software company based in San Jose, California. The name used to be “Fair Isaac Co,” in honor of its founders, Bill Fair and Earl Isaac. The name was later shortened to FICO officially and is now recognized as a leading analytics software company that lenders use to get customer credit scores.

FICO uses an algorithm to predict customer spending habits and rates their financial reliability on a scale of 300 to 850, otherwise known as a credit score.

What's the difference between my FICO score and my credit score?

Your credit score is determined by private companies like FICO, but FICO is the most recognized company that banks and lenders use to determine customer lending potential.

How does FICO determine my credit score?

Your credit score is rated on these five components:

1.Payment history is responsible for 35% of your FICO credit score. While it’s mostly determined by on-time payments, other parts of your payment history include:

The most straightforward way to improve your credit history is making payments on time. However, remember that minimum payments on installment loans work differently than minimum payments on open credit lines like credit cards. Even if you’re meeting credit card minimum payment requirements on time, you may still end up with a high balance on the card, which will negatively impact your credit score. To learn more about this, read below about credit utilization.

2. Credit utilization ratio influences 30% of your FICO credit score and is determined by how much total debt you have compared to how much credit you have available. Credit utilization ratio is determined by:

It’s important to stay on top of your spending and if you can, pay off the balance on your credit card periodically rather than waiting to pay it off in one large sum.

3. Length of credit history determines about 15% of your FICO credit score. This percentage can be broken into three parts:

Industry experts recommend you avoid closing out credit lines that you’ve had for a long time when trying to improve your length of credit history. However, it’s still important to stay active in your accounts so they don’t qualify as unnecessary credit.

4. Amount of new credit determines 10% of your FICO credit score. The factors that play into this percentage are:

Improving your credit score in this category starts with having a credit history. Applying for loans means being subject to a “hard inquiry,” which is basically a background check on your credit history. For people with extensive credit histories, this type of inquiry may only shave five points off their credit scores, but if you have a less established credit history your score could take a more serious hit.

Try not to apply for more credit than you need; subjecting yourself to multiple inquiries in a short time frame could impact your credit score. This doesn’t mean you should never apply for credit cards and loans, just think critically about how much credit you need before taking it out.

5. Credit mix is the variety of credit accounts you have, and this determines another 10% of your credit score. The kinds of debts and how they impact your score are:

Creditors want to see that you’ve had experience with various types of loans. However, there are some types of loans that will still negatively impact your credit score, such as finance company accounts that indicate the debtor was not approved for a loan through other financial institutions with lower interest rates, and some retail accounts that indicate frequent spending on luxury goods. Some debt is good debt, but try to avoid taking out loans through less reputable institutions.

The bottom line

There are many ways to build a good credit score, but one of the best ways is by checking in on your accounts regularly and having a solid understanding of your personal finances.

More information

We are committed to helping you bank better by providing personalized solutions. Our dedicated colleagues can help you find the right product to match your needs. To learn more, please call 1-888-333-5145, visit us online, or Ask a Citizen at your nearest Citizens Bank Branch.


Disclaimer: Views expressed may not necessarily reflect those of Citizens Bank. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation. You should do your own research and/or contact your own legal or tax advisor for assistance with questions you may have on the information contained herein.

FICO® is a registered trademark of Fair Isaac Corporation. References to resources or organizations listed in this article do not constitute or imply endorsement or support by Citizens Bank.

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