How is your credit score calculated?

factors making up credit scores
September 08, 2021 | Thomas Muellner

Whether you’re applying for student loans, securing a mortgage, or opening up a fresh line of credit, there’s nothing more important than your three-digit credit score. A healthy credit score can unlock doors and provide a wealth of advantages, while a neglected rating can quickly throw a roadblock into your plans for the future.

But how do you know how your credit score stacks up?

A crucial first step toward reaching your financial goals is understanding how your credit score is calculated. It’s a complicated equation, but by doing a little bit of homework and keeping tabs on your financial history, you stay on track to building up a positive reputation for the future.

Get to know the big three credit bureaus

Any conversation about credit is likely to circle back to the three main credit reporting bureaus: Equifax, Experian, and Transunion.

These bureaus assemble personalized credit histories for every adult consumer in the United States. They collect information from credit issuers (e.g., banks, credit unions and credit card companies) and companies you do businesses with (e.g., Verizon, Comcast), as well as public data (e.g., tax liens, bankruptcy). For better or worse, they hold a log of every credit card payment you’ve made, every loan you’ve applied for and every new account you’ve opened, among other financial transactions.

The information the bureaus have collected is put into a scoring model – FICO and Vantage are the most common – and the result of that calculation is your three-digit credit score.

Confused? Don’t sweat it. If you think of your lifelong credit history as an ongoing homework assignment, the information gathered by the credit bureaus is how you “show your work” to those grading your assignments. The credit formulas are the curve that’s used to make up your final grade. The more answers you get right, the better you’ll fare at the end of the term. And don’t forget that class is always in session!

Key credit factors

The specific equations used by credit reporting companies are not public, but they do provide guidance about the factors that influence the final output. Each element – payment history, credit utilization, age of credit and total accounts, and credit inquiries – is weighted differently but they’re all important.

Payment History (35%)

Plain and simple, your payment history indicates whether or not you’ve paid your bills on time each month. It’s the most critical factor in your credit score because it is the most predictive of whether you’ll pay on time in the future. Even if you need to carry a balance, you should always pay at least your minimum monthly payment and pay it on time. Just one or two late payments can spell disaster for your credit in the short-term. Worse yet, derogatory marks, such as collections notices or property liens, can have devastating long-term consequences.

Credit Utilization (30%)

Like payment history, credit utilization plays a major role in your overall credit rating. Utilization relates primarily to revolving lines of credit (i.e., credit cards and home equity lines of credit) and is tallied as the ratio of credit you’re currently using to the total amount of credit available to you. For example, if you’ve got $4,000 worth of credit card debt and a total credit limit of $10,000, your utilization rate is 40%. As a rule of thumb, it’s ideal to keep this ratio under 30%, and having utilization of 10% or less is even better.

Age of Credit (15%) and Credit Types/Total Accounts (10%)

As slightly less significant factors, the age of your credit history, the types of credit included in your credit history (mortgage vs auto vs credit cards vs other loans), and the number of your open accounts are used to show you’ve had a consistent track record managing credit. Because of this, it can be a smart idea to get a secured or low-limit credit card early on in life as a way to front load your history. Another option for a young person just starting to build their credit history is to get a boost by being an authorized user on your parents’ credit card. In any case, to be in the highest standing with credit issuers, you’ll likely need to have 10 or more total accounts (active and closed) with an average age of at least 6-7 years, so don’t wait to get started.

Credit Inquiries (10%)

Lastly, the lightest factor used to calculate your credit score is the number of recent credit inquiries you’ve had. These hard inquiries or “hard pulls” typically occur when you apply for a new line of credit, go through a background screening or open up a new utility account, among other instances. Hard pulls can cause a short-term dip in your score, but they typically fall off of your credit report after 18-24 months, making them a non-issue for your long-term credit outlook. If you’ll be applying for a big loan in the short-term, though, you may want to hold off on applications that require a hard pull. For example, think twice about applying for a new credit card just before you apply for a mortgage or car loan.

What is a good credit score?

Now that you know how your credit score is calculated, you’re probably wondering what qualifies as a good score. After all, good or excellent credit often equates to enticing credit offers at better rates, and gives you added flexibility when making financial moves.

Knowing what makes a good credit score matters.

Using the FICO scale, any score of 670 or higher is considered a “Good” rating; scores above 740 are viewed as “Very Good” or “Exceptional.”
Using the Vantage 3.0 scale, a score above 700 is deemed “Good” while a score of 750 or better is seen as “Excellent.”

While the differences may seem subtle, be sure to take note. Certain lenders may use one rating scale over another (or both), and being even a few points off the mark could mean a higher interest rate or failure to qualify for a loan altogether.

How do I find out my credit score?

Good news: If you’re interested in learning what your current credit score is, as well as about the details of your credit report, the information has never been easier to access.

Consumers can now get their hands on their personal credit information for free in a matter of minutes. Every 12 months, all three major credit bureaus are required by law to provide you a full credit report free of charge to help you identify potential issues and keep an eye on your financial standing.

To help our members keep up with the changes in their credit, Alliant provides credit scores for free, updated quarterly. 

Now that you know how to leverage your credit score for the better, you’ve got every reason to ace your next exam. By keeping your credit score top of mind and addressing factors that are weighing you down, you can be sure you’re positioned for success before your next big financial move. 

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