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

How Your Credit Score Is Determined
BY Noelle Marr
Sep 8, 2021

Most consumers have no idea how their credit score is determined. They just know having a “good” score makes it easier for them to get a new loan or credit card. 

A high credit score can result in more favorable lending terms, like a lower interest rate, and a low score could mean less favorable rates or a denial altogether. That’s because this three-digit number provides creditors with a snapshot of your current credit situation. It helps them gauge your creditworthiness and the risk they have to take on if they decide to lend to you. 

But who decides if your credit score is “good” and how do they make that determination? 

Who determines your credit score?

Your credit score is determined by the three credit reporting agencies: TransUnion, Equifax, and Experian. These bureaus utilize a credit scoring model to calculate your credit score.

The most widely used model is the FICO score, created by the Fair Isaac Corporation (FICO®). Because it’s so popular, you may hear some people refer to your credit score simply as your FICO score. Another model is the VantageScore, which was developed by a partnership among the three credit reporting agencies. 

The complex algorithms in these models analyze the information in your credit report to come up with your score. It’s important to note that each bureau may come up with a slightly different score even if they all use the same scoring model. 

That’s because not all creditors and lenders report to all three agencies. There’s actually a cost involved with reporting, so some creditors only report your payment status, balances owed, and other account information to one or two of the agencies.

Because your credit report may look slightly different from one agency to another, your score could vary as well. This is one of the reasons why people get confused about their credit score calculation.  

What factors go into determining your credit score? 

Since the FICO scoring model is so popular, let’s take a look at the credit report information it analyzes to determine a person’s credit score. These are the five factors it takes into its calculation: 

  1. Payment history accounts for whether or not you’ve made payments to your lenders on time. It includes how often you miss payments, how many days late those payments were, and how recently you missed payments. The higher the ratio of on-time payments to late payments, the more creditworthy you’ll look to a lender.

  2. Amount owed is based on the ratio of money you owe compared to the amount of credit you have available, otherwise known as your credit utilization ratio. If you’re using up nearly all of your available credit on your credit cards and loans, your ratio is going to be high, and this is going to negatively impact your score.

  3. Length of credit history 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. Alternatively, a short history of credit usage doesn’t give lenders the same level of confidence in your experience handling debt. 

  4. New credit looks at the number of new accounts you’ve opened recently. If you’ve opened several accounts in a short window of time, it can be a signal to lenders that you’re having financial difficulties. However, the negative effect of this is not long-lasting.   

  5. Credit mix is the combination of your various credit account types. A variety of loan types, such as home loans, credit cards, and mortgages, will generally lead to a higher score. It shows that you have experience with managing multiple credit accounts at once and gives the lender more confidence. 

Which factors are most important?

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

What is a “good” credit score?

Credit scores can range from 300 to 850, categorized from Very Poor to Exceptional. This chart breaks down the impact of each score range and rating. 

800-850ExceptionalAlmost guaranteed approval for most types of credit, including top credit cards with the best rewards, the absolute lowest interest rates and fees.
740-799Very GoodLikely approval for almost any type of credit and favorable rates and fees from lenders.
670-739GoodLikely credit approval, and competitive credit Rates, but not the ideal rates obtained by “very good” and “exceptional” scorers. Additionally, it may be harder to qualify for some types of credit.
580-669FairMany lenders will approve applicants with “fair” credit but borrowers will be unlikely to receive competitive interest rates.
300–579Very PoorCredit applicants may be required to pay a fee or deposit, or may not be approved for credit at all.

How does debt impact my credit score?

If you’re struggling with debt, your credit score may be struggling too, since the second largest factor is your credit utilization ratio. 

However, since payment history is the largest factor, your credit score could still be “good” even if you’re struggling with debt—as long as you stay consistent with minimum payments. 

Believe it or not, this is actually a very risky situation to be in. Remember, your credit score and ability to get favorable lending terms is not the only part of your financial health that matters. So does your ability to pay bills, plan for retirement, save up for emergencies, and achieve other goals. You may be able to achieve all of those things with or without a good score, but it will be extremely difficult if you’re saddled with a heavy debt burden.

The reality is if you just focus on paying monthly minimums to protect your credit score, you’re not doing much to actually pay down your debt and improve your financial health. As the debt continues to grow, so do the minimum payments. And once you fall behind on those, you are in a bad situation where your debt is growing and your credit score is falling.

If you want to improve your long-term overall financial health, you may have to put your score on the back burner temporarily and prioritize solving your debt problem first. And 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.