How Credit Scores Work: The 5 Factors That Decide Your Score

Your credit score affects the interest rate on a mortgage or car loan, whether a landlord approves your application, and even your insurance premiums in many states. The good news is that the formula isn't a mystery. Once you know what moves the number, improving it becomes a checklist.

What is a credit score?

A credit score is a three-digit number that estimates how likely you are to repay borrowed money on time. It is calculated from the information in your credit reports, which the three national credit bureaus (Equifax, Experian and TransUnion) maintain.

The most widely used scores are FICO® Scores, used by most lenders, and VantageScore. Both typically range from 300 to 850. You don't have just one score: different models and bureaus can give slightly different numbers.

What is a good credit score?

Lenders set their own cutoffs, but scores in the mid-700s and above usually qualify for the best rates on most loans.

The 5 factors in your FICO score

FICO publishes the general weight of each category for the typical consumer:

1. Payment history (35%)

This is the biggest factor. A single payment that is 30 or more days late can drop a good score significantly, and late payments can stay on your report for up to seven years. Set up autopay for at least the minimum on every account so a busy month never becomes a late payment.

2. Amounts owed and credit utilization (30%)

Credit utilization is the share of your available revolving credit that you are using. If you have a $1,500 balance on cards with a total limit of $5,000, your utilization is 30%.

Lower is better. A common guideline is to stay below 30%, and people with the highest scores often use under 10%. Utilization is usually based on the balance your issuer reports, often your statement balance, so paying down the card before the statement closes can lower it even if you pay in full every month.

3. Length of credit history (15%)

Older accounts help. That is why closing your oldest no-annual-fee card can hurt: it can shorten your average account age and reduce your total available credit, which raises utilization.

4. New credit (10%)

Applying for credit usually triggers a hard inquiry, which can lower your score a few points for a while. Inquiries stay on your report for two years, but their impact fades sooner. Checking your own score is a soft inquiry and never hurts. When rate shopping for a mortgage, car or student loan, multiple inquiries within a short window are typically treated as one.

5. Credit mix (10%)

Having both cards and installment loans (auto, student, mortgage) can help slightly. It is never worth taking on a loan just to improve your mix.

How to raise your credit score

1. Check your reports for errors. You can get free reports from all three bureaus every week at AnnualCreditReport.com, the official site. Dispute mistakes like accounts that aren't yours or payments wrongly marked late.
2. Never miss a payment. Use autopay and calendar reminders.
3. Lower your utilization. Pay balances down, pay before the statement date, or ask for a credit limit increase (without spending more).
4. Keep old accounts open if they don't charge a fee.
5. Space out new applications.
6. Building from scratch? A secured credit card or becoming an authorized user on a responsible family member's card can help you establish a history.

If high balances are the problem, a structured payoff plan makes the biggest difference. See debt avalanche vs snowball.

Credit score myths

• "Checking my score hurts it." False. Checking your own score is a soft inquiry.
• "I need to carry a balance to build credit." False. Paying in full every month builds credit and avoids interest.
• "My income affects my score." False. Income isn't part of your credit report, though lenders may consider it separately.
• "Paying off a collection removes it." Not necessarily. Newer scoring models treat paid collections more favorably, but the record may remain.

How long do negative items stay on your report?

Most negative information, such as late payments and collections, can be reported for up to seven years. Some bankruptcies can stay for up to ten years. Their impact fades over time, especially as you add new on-time payments.