What is a credit score? The simple answer is: a three-digit number that summarizes your credit history. Your credit score is important because it predicts for lenders the likelihood you might fall 90 days or more behind in your credit card or loan payments during the next two years.1 That’s why lenders sometimes call them risk scores.
Credit scores generally fall between 300 and 850—and everyone has many credit scores. Given all the variations in scoring models and other factors, experts say you likely have hundreds of credit scores.2 (If you don’t know your score, read “How to Check Your Credit Score for Free.”
Because those three-digit numbers can heavily influence whether you are approved to borrow money, how much you’ll pay if you are approved, and even non-credit issues such as whether you can get a job or a place to live, it’s vital to understand what a credit score is and the principles of how your score is determined. Without that information, you could unknowingly take actions that might negatively affect your financial future.
Your credit scores will be different depending on:
- The scoring model used to calculate it (the two best-known being FICO and VantageScore)
- The credit bureau whose report is used to generate your credit score
- The exact time your credit score is requested
Credit scoring was developed by the Fair Isaac Corp., which introduced its namesake FICO score in 1989. There have been numerous iterations since then. FICO says its score is used in more than 90% of U.S. lending decisions,3 and no one denies it’s the dominant scoring model.
To have a FICO credit score, you must have a credit account that’s at least six months old and activity on an account within the previous six months—they don’t need to be the same account.4 If you meet that criteria, the rest of the formula for calculating your FICO score remains a trade secret.5 However, FICO does share the categories it uses to group data and how it weights those categories. Of your total score:6
- 35% is your payment history. It reflects whether you have paid your creditors on time.
- 30% is what you owe. This portion is shaped by your credit utilization, meaning how much of your available credit you have used. The less you’ve used, the stronger this part of your score will be. Experts suggest you use 30% or less of your available credit to score well.
- 15% is the length of your credit history. It’s based on how long your accounts have been open, and the timing of your most recent account transactions. A longer credit history pays a higher score.
- 10% is your credit mix. This category considers the various ways in which you’ve borrowed money, such as credit cards, installment loans, mortgages, retail accounts and so on. A diverse mix works in your favor.
- 10% is your new credit. This reflects the credit inquiries you’ve made and the new accounts you’ve opened. A lot of activity in this category will lower your score.
Keep in mind that these general guidelines are not absolute. FICO says the weighting varies depending on the exact details of your credit profile. For example, scores for credit newbies are calculated differently than those for people with long-established credit.7 Also, there are three slightly different versions of the basic FICO score, one tailored for each of the three credit reporting agencies.8 FICO also calculates somewhat differently for its various industry-specific scores. In all, FICO says there are 19 different versions commonly used by lenders.9
FICO’s chief competition is VantageScore. Introduced in 2006, it was developed jointly by the three major credit reporting bureaus. Today, it’s independently managed by VantageScore Solutions, which is owned equally by the three bureaus. VantageScore Solutions says its credit score is used by more than 2,800 creditors across all industries except, notably, mortgages.10
Although its initial scores ranged from 501 to 990, the commonly used VantageScore 3.0 and the most-current VantageScore 4.0 mirror FICO’s 300 to 850 range. (For more on the implications of these ranges, see “Credit Score Ranges: What is an Excellent, Good, or Poor Credit Score?”) VantageScore also uses similar categories to organize data, though it weighs them somewhat differently than FICO. Rather than using percentages, VantageScore relies on descriptive phrases to break down your score. In descending order of influence, those weightings are:11
- Extremely influential: Total credit usage, balance and available credit
- Highly influential: Credit mix and experience
- Moderately influential: Payment history
- Less influential: Age of credit history and new accounts
VantageScore also distinguishes itself by what it terms “consistency,” meaning that it intends its scores to be used across all industries. There are no industry-specific versions. Still, VantageScore acknowledges there may be some differences in your score from one credit reporting company to another.
Both FICO and VantageScore 3.0 are calculated solely on your credit history. Neither considers any other factor, such as age, race, gender, marital status, salary, occupation, or even financial assets.
The data that’s used by the FICO or VantageScore model generally comes from one of the three largest credit reporting bureaus—Equifax, Experian, and TransUnion.12 These companies collect information from creditors about your debts and payments. Because creditors report different information to each bureau, at different times, your scores are likely to be different at each. Also, as mentioned above, each agency uses slightly different FICO models.
Therefore, when you get your free credit score you’ll want to know which bureau it came from. Your credit score also changes over time as new information is added to your file at each credit bureau.
Because of all that, your credit score is fluid. If your score isn’t what you want it to be today, you can improve it over time by managing your credit responsibly.
