How Credit Scores are Calculated

Reader Question: "How are credit scores calculated and what can I do to improve mine? Is there a website somewhere that explains how they are calculated?"

Let me start by saying there are many different types of credit scores. But the one you're probably referring to is the score produced by the big three reporting companies. Your FICO score, in particular, is the one used most often by mortgage lenders and other creditors. So let's talk about how it gets calculated and what you can do to improve it.

How It Gets Calculated

Your scores come from your credit reports, which are produced by the three companies shown in the image below. Each company has its own unique process for compiling data and producing reports.

But when it comes to converting that data into a credit score, they are all calculated pretty much the same way. The date found within the report is put through some kind of scoring model, and that is how the final number is produced.



As far as the FICO scoring model goes, there are five key factors that influence the final score. The range runs from 300 on the low end to 850 on the high end. The higher the score, the better it is for you.

The image below shows what these five influencing factors are: (1) your history of bill payments, (2) the amount you currently owe across all credit accounts, (3) the length of your credit history, (4) new accounts, and (5) the types of credit that you are currently using.



You can see by the percentages above that these factors carry a different amount of "weight" when your credit score is calculated with this model. The two things that influence your number the most are payment history and amount owed. So if you pay all of your bills on time, and you maintain a low balance on your credit cards (relative to the available limit), you'll be able to maintain a good score.

Improving Your Score

Understanding how a score is calculated is the first step to improving it. So if you find that your numbers are low, you should focus your effort on the things we've talked about above. You should work hard to pay all of your bills on time. You should reduce the credit card balances you currently owe, to improve your "utilization ratio."

You should also get copies of your reports from all three reporting bureaus and read through them for accuracy. Correct any errors you find in your reports, since they can lower your score more than it should be.

Now that you know how your credit score is calculated, there's nothing stopping you from improving it. There really is no mystery to all of this. Some people make it more complicated than it is, but I recommend keeping things simple. Focus on the major factors that influence your score. Put your effort where it counts the most, and you'll see the best results in the shortest time.

Here are some more articles on the blog that complement this one:

• How to Raise Your Score Fast?
• How Do I Improve My Credit History?

I hope this answers your question. Remember, there's a lot of information on this website. So if you have additional questions about anything we have discussed here, use the search tool at the top of the site. You can find articles and advice on nearly every aspect of credit reports and scores -- how they are calculated, how to improve them, the minimum needed to get a mortgage loan, and much more. Good luck.