Where Do Credit Scores Come From?

Today, it’s common knowledge that credit scores impact your financial life in many important ways. Anytime you apply for a mortgage, car loan, credit card, or financing of any kind, a lender is likely to consider your credit score to determine whether it’s willing to approve or deny your financing application. And if a lender approves you for financing, your credit scores typically come into play again to determine what kind of interest rate and fees you’ll pay plus other details that could affect your cost of borrowing money.

Yet only a few short decades ago, credit scores like the FICO® Score and VantageScore didn’t exist. And even though these credit scoring systems play such a vital role in our financial world today, many people feel confused about how they work. 

The guide below aims to give you a peak behind the curtain at the factors that make up your credit score. Spoiler alert: Every detail that affects your credit score is located on your credit report. Here’s what you need to know.

The Job of a Credit Score

There are three major credit bureaus in the United States—Equifax, Trans Union, and Experian. The credit bureaus collect and maintain your credit reports. Credit reports are a detailed record of your credit history, but your credit score is not a part of your credit report. Instead, a credit score is an add-on product—like buying a phone case to go with your new smartphone purchase.

The purpose or job of a credit score is to predict risk. Before a lender or credit card issuer loans you money, it needs to know whether you’re likely to repay the cash you borrow as promised. So, credit score developers designed FICO Scores and VantageScores to predict the likelihood that you’ll repay your credit obligations late (by 90 days or worse) anytime within the next 24 months.

Most FICO and VantageScore credit scores range from 300 to 850. If a credit scoring model reviews your credit report and determines you’re likely to make severe late payments in the next 24 months, you’ll earn a lower credit score. But if you have a clean credit report, a scoring model may determine that the risk of you making late payments is lower and reward you with a higher credit score instead.

How Credit Scores Work 

Lenders use both FICO and VantageScore credit scores to assess the credit risk of potential borrowers. According to FICO, 90% of top lenders use the FICO Score. For the sake of simplicity, we’ll focus on the details that make up your FICO Score below. However, while VantageScore credit score factors are similar, they could be slightly different. (That’s one of the reasons it’s possible for two lenders to pull your credit score on the same day and receive two different results.)

There are five primary categories that make up your FICO Score.

• Payment History: 35%
• Amounts Owed: 30%
• Length of Credit History: 15%
• New Credit: 10%
• Credit Mix: 10%

Within each category, a credit scoring model will ask questions about your credit report. In the credit scoring world, these questions are called characteristics. For example, a credit scoring model might ask, “Does the credit report have any collection accounts?” The answers to the questions a credit scoring model asks are called variables. Variables determined the number of points you earn in each credit score category. And when a credit scoring model adds the points together from each category, you receive your overall credit score.

What Factors Make Up Your Credit Score?

Payment History (35%)

Payment history, a record of how you’ve paid your credit obligations in the past, accounts for 35% of your FICO Score. Perfect payment history won’t earn you a perfect 850 FICO Score. But this good habit could be a good place to start.

FICO considers several details (aka characteristics) when calculating your score in the Payment History category.

• Your payment history on installment loans, credit cards, mortgages, and other accounts
• If you have delinquent payments, how overdue they are today and in the past
• How much money you owe on delinquent accounts and collection accounts
• How many past-due accounts appear on your credit report
• Any bankruptcies that appear on your credit report
• How much time has passed since collection accounts, late payments, or bankruptcies appeared on your credit report
• How many accounts on your credit report are paid as agreed

Amounts Owed (30%)

The Amounts Owed category makes up 30% of your FICO Score. This credit score category focuses on how much debt you carry, but especially how you manage your credit card debt.

Your credit utilization ratio plays a major role in your credit score calculation in this category. Credit utilization measures the relationship between your credit card limits and credit card balances, or the percentage of your available credit in use. When you use a high percentage of your credit card limits, it can signal that you’re overextended financially and, therefore, at a higher risk for making late payments in the future.

The main characteristics FICO considers within the Amounts Owed category are as follows.

• Your credit utilization ratio on revolving accounts, like credit cards and lines of credit (LOCs).
• How many accounts on your credit report have outstanding balances. (Tip: Fewer accounts with balances is typically better for your FICO Score.)
• The amount you owe on all of your credit obligations.
• The amount you owe on different types of accounts (e.g., credit cards vs. installment loans).
• How much you still owe on installment loans compared to the original loan balance.

Length of Credit History (15%)

The length of credit history on your credit report makes up 15% of your FICO Score.  In this credit score category, FICO won’t consider your own age when calculating your score. But the age of the accounts on your credit report are fair game. The older the accounts on your credit report, the better the impact will be on your credit score.

Below are the primary factors that affect your credit score where Length of Credit History is concerned.

• The amount of time the credit accounts on your credit report have been open
• Average age of all accounts on your credit report
• Ages of the oldest and newest accounts on your credit report
• The amount of time each credit obligation on your report has been open

New Credit (10%)

The New Credit category accounts for 10% of your FICO Score. Applying for new credit and opening new credit accounts is an indicator of credit risk. As a rule, you don’t have to be afraid to apply for new credit when you need it. But if you apply for new credit excessively, it could signal that you’re more likely to overextend yourself financially (and potentially fall behind on your credit obligations).

Here are the primary characteristics that FICO considers within the New Credit category of your credit report.

• The number of hard credit inquiries (aka hard credit checks) you’ve had in the last 12 months
• The length of time since you opened a new credit account

Note: Checking your own credit report is a soft credit inquiry. Soft credit inquiries never cause credit score damage. If you have not reviewed your credit reports in a while, you’re entitled to a free copy of your credit reports from Equifax, TransUnion, and Experian once every 12 months from AnnualCreditReport.com. All three credit bureaus are also giving consumers free weekly access to their credit reports on a voluntary basis through the same website.

Types of Credit (10%)

Types of Credit makes up the final 10% of your FICO Score.  This credit score category considers the mixture of account types that appears on your credit report.

When a scoring model calculates your FICO Score in this category, it considers the following factors.

• The types of credit accounts on your credit report (e.g., installment, revolving, mortgage, etc.)
• How you manage the different types of accounts on your credit report

In general, it’s not wise to go into debt just to improve the mixture of account types on your credit report. You don’t want to take out a car loan, for example, just to have this type of loan show up in your credit history. But as your types of credit history grows naturally more diverse over time, you may be eligible to earn more points within this category. Also, it could be worth considering a credit card account (if you can manage it well and avoid debt) if you don’t already have one.

Bottom Line

Understanding the factors that influence your credit score is an important step if you want to earn and maintain good a good credit rating. Once you know the details that credit scoring systems consider as they calculate your credit score, you can work toward making sure your credit report is in the best shape possible. As you consistently practice responsible credit management habits over time, you should put yourself in a better position to earn a higher credit risk score.

Michelle Lambright Black is a leading credit expert, writer, speaker, and credit expert witness with nearly two decades of experience in the credit industry. She is an expert in credit reporting, credit scoring, financing (mortgages, credit cards, loans), debt eradication, budgeting, saving, and identity theft. She’s featured in print monthly with brands such as Yahoo! Finance, FICO, Forbes Advisor, Reader’s Digest, LendingTree, Newsweek, Fortune Recommends, and more. Connect with Michelle on X (@MichelleLBlack) and Instagram (@CreditWriter).

Articles to check out:

• How two people who hate budgeting actually budget
• 13 Travel Splurges That Are Actually Worth the Money, According to Travel Experts
• Money Rules I Break on Purpose
• How We Afford to Travel More
• The September Money Reset