The Good, Fair, and Poor: How Your Credit Score Is Determined

Your credit score is an important part of your financial health. When you know how your credit score is determined, you can use that knowledge to improve your score. It doesn’t take long to learn, and the knowledge can pay off in many ways.

For starters, a higher credit score usually means you get a lower interest rate on loans. Good credit could also help you get better credit cards, including cards that earn cash back on your purchases. In most of the U.S., your credit standing could affect your insurance rates. It could also influence your ability to rent an apartment.

So who decides if your credit score is good, and how do they decide? Here’s what to know.

Freedom Debt Relief isn't a Credit Repair Organization and doesn't provide, or offer, services or advice to repair, modify, or improve your credit.

Who Determines Your Credit Score?

The three major credit bureaus—TransUnion, Equifax, and Experian—compile information that makes up your credit report and determines your credit scores. Your credit score is calculated based on your credit report using a formula called a credit scoring model.

Your credit scores from the three bureaus might not be identical, even if they all use the same scoring model. The reason? Not all creditors and lenders report to all three agencies. There are costs involved with reporting, so some creditors only report to one or two of the agencies. This makes it likely you have a different credit score at each one. 

To check that credit bureaus haven’t made mistakes, get a copy of your credit report from each bureau at least once per year. You can pull your credit report for free at AnnualCreditReport.com and review it for errors.

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What Are the Different Credit Scoring Models?

The two main credit scoring models are FICO® Score, made by the Fair Isaac Corporation, and VantageScore. Of the two main types of scores, FICO has been around much longer and is more widely used. FICO reports that 90% of top lenders use its scores. VantageScore can also be useful, but FICO is usually what lenders see when they check your credit.

FICO and VantageScore use similar information to calculate credit scores. They primarily look at the following:

• Your track record of on-time and late payments

• How much of your credit you use

• How long you’ve been using credit

• Your credit mix (if you use credit cards, loans, or both)

• How many recent credit card and loan applications you have.

Each model weighs these factors differently, so your FICO Score and VantageScore aren’t usually the same. FICO and VantageScore have proprietary formulas, so we don’t know exactly how they calculate credit scores. But each company provides some information on their calculation methods.

For example, your payment history is the most important factor with both FICO and VantageScore. But VantageScore values it a little more. FICO, on the other hand, values the amount of credit you use and your recent credit applications more than VantageScore.

To make it more complicated, FICO and VantageScore both offer several scoring models. Each model uses a slightly different formula. Lenders choose the scoring model that best fits their needs. There are special models for auto lenders, mortgage lenders, and credit card companies, among others.

What Factors Go Into Determining Your Credit Score?

Since the FICO scoring model is the most widely used, we’ll look at it more closely. There are five factors it considers.

Payment history

Payment history is your track record of paying back money you’ve borrowed. Every time you make a credit card or loan payment, your creditor probably reports it to the credit bureaus.

Missed payments are bad for your credit score, but the credit reporting system gives you a grace period. A payment is only considered late on your credit history when it’s at least 30 days past-due. If you miss a payment but get caught up before 30 days have passed, the payment is considered on-time as far as your credit score is concerned.

Once a payment’s late by 30 days, it goes on your credit history. The longer you go without paying, the more it impacts your credit. For example, a payment that’s 90 days past-due is worse than one that’s 60 days past-due.

Payment history also includes any other payment issues on your credit file, such as:

• Accounts reported to collection agencies

• Bankruptcies

• Home foreclosure

• Wage garnishment.

The higher your ratio of on-time payments to late payments, the more creditworthy you look to lenders. People with the highest credit scores have no late payments on their credit files.

Amounts owed

Amounts owed refers to how much debt you have. The biggest factor in this category is your credit utilization ratio. That’s how much credit card debt you have compared to your credit limits. If you’re using nearly all the available credit on your credit cards, your utilization is likely to damage your credit score. As you pay down debt, your credit score should gradually improve.

Let’s say you have the following:

• Card A, with a $750 balance and a $1,000 limit

• Card B, with a $1,000 balance and a $4,000 credit limit

• Card C, with a $1,250 balance and a $2,500 credit limit.

To get your credit utilization, divide the balance by the credit limit. In this example, your credit utilization would be 75% on Card A, 25% on Card B, and 50% on Card C. Combined, your balances add up to $3,000, and your credit limits total $7,500. So your overall credit utilization is $3000/$7,500, or 40%.

Per-card utilization and overall credit utilization both matter. As far as what your credit utilization should be, lower is better. A common myth says that you should aim for less than 30% credit utilization, but there’s no firm data supporting it. FICO says “keeping it below 10% (and consistently paying bills on time) can help you build and maintain a good FICO Score.”

Length of credit history

Length of credit history or credit age is the amount of time you’ve had your credit accounts open. The longer you’ve spent making payments on time, the more positively this will impact your score. A short history of credit usage doesn’t tell lenders how you handle credit accounts over longer spans of time.

With this factor, credit scoring models generally look at:

• The age of your oldest credit account

• The age of your newest credit account

• The average age of your credit accounts.

Credit mix

Credit mix measures how diverse your credit accounts are. There are two main categories of credit accounts:

• Revolving accounts, such as credit cards and lines of credit

• Installment loans, such as mortgages, auto loans, student loans, and personal loans.

A variety of account types is generally good for your credit score. It shows that you have experience with managing multiple types of credit, a positive sign to lenders.

Credit mix is one of the smaller parts of your credit score, though. It’s not worth opening a new account just to have a little more variety. Plenty of people have built excellent credit scores while only using one type of credit.

New credit

New credit looks at the number of accounts you’ve opened or applied for recently. Each time you apply for credit, you could lose a few points off your score. You typically recover those points gradually over the next year.

For this factor, scoring models check the number of hard inquiries on your credit file. A hard inquiry is a credit check that occurs when you apply for credit. If you apply for a loan, the lender usually checks your credit, putting a hard inquiry on your credit history (note that this doesn’t usually apply to prequalification for a loan).

Another type of credit inquiry, a soft inquiry, doesn’t affect your credit score. A soft inquiry is a credit check unrelated to a full credit application. Loan requalification isn’t considered a full loan application, so it usually prompts this kind of inquiry. Or, for example, if you use a credit score tool online, it could run a credit check on you. Since this credit check isn’t for a credit application, it’s a soft credit inquiry.

Why You May Have Multiple Credit Scores

You most likely have many credit scores. This is completely normal, because of the number of scoring models and credit bureaus.

In addition to the three credit bureaus—Equifax, Experian, and TransUnion—there are the two credit score models: FICO and VantageScore. You have a FICO Score and a VantageScore with all three bureaus, so already, that’s six potentially unique scores.

FICO and VantageScore also have multiple scoring models. FICO alone has over a dozen scoring models, with models for general scoring purposes, mortgage lending, auto lending, and credit card applications. These models can be used with each credit bureau, meaning you (and everyone else) could have well over 30 FICO Scores alone.

So, if you apply for an auto loan and a credit card, each company will probably see a different credit score for you. The auto lender may pull a credit score calculated using an auto lending model. The credit card company could pull a score calculated using a credit card model.

Your credit score can also change every time information on your credit report is updated, which normally happens every month. This is another reason you could see different numbers each time you check your credit score.

Educational credit scores vs. lending scores

The credit score you see in a credit monitoring tool may not be the same one a lender sees. Some credit monitoring tools provide educational credit scores. Educational scores are used by these online credit score tools to give people an accurate idea of their credit.

Lending scores are what lenders and credit card companies see when they check your credit. These scores use industry-specific scoring models, such as the auto lending and mortgage lending FICO score models.

Which Credit Score Factors Are Most Important?

Some of these factors carry more weight than others. This chart shows what percentage of your score each factor makes up.

What Is a Good Credit Score?

Every lender decides what it considers an excellent, good, fair, or poor score, so these ranges are a guideline, not a rule. 

FICO considers a good credit score between 670 and 739. According to VantageScore, good credit ranges from 661 to 780. Both types of credit score have a range of 300 to 850, so 850 is the highest possible credit score.

Here’s a  breakdown of all the FICO Score ranges and what it means to have a score in each range when you apply for a loan or credit card.

Credit Score Ranges and What They Mean for Debt Management

Your credit score affects your debt management options. If you want to get a debt consolidation loan for credit card debt or other types of debt, it helps to have a good credit score. With a score in this range, you’re likely to find a lender who’ll approve you for a loan at a reasonable interest rate. Without good credit, it’s harder to get approved for a loan, and if you’re approved, you could end up with a hefty interest rate.

One way to consolidate debt with bad credit is a home equity line of credit (HELOC) or loan. With a HELOC or home equity loan, you borrow against your home. Because your home is the collateral, you don’t need a high credit score—some lenders may allow you to apply with a score of 600.

If you can’t keep up with your debt payments, a debt relief program may be an option. Unlike debt consolidation loans and HELOCs, debt relief is available no matter your credit score. With this option, a debt relief company works with you, negotiating with creditors on your behalf for debt settlement.

You’ll most likely see your credit score drop during the debt relief process. But if you haven’t been able to make your payments, that’s probably already brought down your credit score. Debt relief gives you the opportunity to get free of debt so you can rebuild your credit and your finances.

Common Credit Score Myths and Misconceptions

Quite a few myths and misconceptions exist about credit scores. Here are some of the most common.

Myth: Checking your credit score lowers your score

Credit score tools usually only put a soft inquiry on your credit file. Soft inquiries don’t impact your credit, making them different from the hard inquiries associated with credit applications. You can double check this with any credit score tools you use—they typically make clear that there’s no impact to your credit score.

Myth: Your income affects your credit score

Income isn’t part of the credit score calculation. Employment status isn’t either. You don’t need to be a high earner to have a high credit score.

Myth: Carrying a credit card balance is good for your credit

This is one of the most dangerous credit score myths, because it leads to paying unnecessary interest charges. You don’t need to carry a balance on your credit card to have good credit. You’re better off paying your credit card in full whenever possible to avoid interest.

Myth: Closing a credit card improves your credit

Closing a credit card normally doesn’t improve a person’s credit score. It could have a negative impact, because you lose that card’s credit limit, reducing the total amount of available credit. If you have other cards with balances on them, then your credit utilization ratio could increase and affect your credit score.

What Doesn’t Go Into Your Credit Score?

Information outside your credit report has no impact on your credit score. Your score is based entirely on your credit history.

Your credit score is unaffected by your:

• Income

• Age

• Employment history

• Marital status.

Rent, utility bills, and everyday expenses don’t impact your credit, either. Most landlords and utilities companies don’t report payments to the credit bureaus. 

If you don’t have a lot of experience with credit, you can request a credit score that factors in your on-time rent or utility payments. This is an alternative score, and you don’t get it automatically. FICO, VantageScore, and all three credit bureaus offer alternative scores. In some cases, the creditor has to request it. Search for Experian Boost or UltraFICO. If you know you want your rent payments reported, search for Rental Kharma or RentReporters.

How Does Debt Impact Your Credit Score?

If you’re struggling with debt, your credit score may be struggling, too. Credit card debt can be especially problematic, because credit utilization is such a large part of your credit score. If you’re close to maxing out your credit cards, you have high credit utilization, and that hurts your credit score.

But your payment history is the largest factor, so you could still have a good credit score even if you’re deep in debt—as long as you consistently make payments on time.

But believe it or not, this is actually a risky situation. Your credit score and your ability to get approved for loans aren’t all that matter. You also need to be able to pay bills, plan for retirement, save for emergencies, and work toward other money goals. You could achieve those things with or without good credit, but it’s extremely difficult if you’re saddled with lots of debt.

If you have lots of debt and focus on paying only monthly minimums to protect your credit score, you’re not paying down your debt enough to improve your financial situation. As the debt continues to grow from accruing interest, so do the minimum payments. And if you fall behind on those payments, your credit score could fall while your debt grows.

Sometimes, to take care of your overall financial health, you need to put your credit score on the back burner temporarily and prioritize debt. That’s where Freedom Debt Relief comes in.

For less than the amount you’re paying in monthly minimums now, our debt settlement program could help reduce the amount you owe your creditors and get rid of your debt. To find out more, give one of our Debt Consultants a call at 800-910-0065.