An Introduction To How Credit Scores Are Calculated

For a long time I had referenced credit scores in post, but never really wrote anything introductory like this, rather just talking about things like the best credit cards for reselling. In truth it’s a topic I understand but never considered myself an expert in. So I asked William Charles of Doctor of Credit, who is truly an expert in this stuff to write the following Introduction to How Credit Scores are Calculated. -Trevor

How Credit Scores are Calculated

Trevor asked if I might be interested in writing a guest post on how credit scores are calculated and here we are. In this post I’ll try to give you a primer on the different types of scores and how they are calculated. There are two major credit scoring algorithms:

  • FICO Score
  • VantageScore

To make matters even more confusing for you each of these scores has different variations and model numbers (e.g FICO offers a FICO Bankcard Enhanced 8 model that aims to be more useful to credit card issuers). That being said, it’s important not to get bogged down by the details and instead focus on the overarching scoring criteria instead. Remember that the aim of credit scores is to determine how ‘worthy’ an individual is of credit without manually having to look at their credit history. This lets lenders make split second decisions on whether to extend you credit or not.

General Credit Scoring Factors

Almost all credit scoring algorithms will look at the following, with slightly different weighting of importance:

  • Payment History. The importance of looking at payment history data should be obvious. If you had two friends and one had always paid you back on time and the other was always late in paying you back who would you prefer to loan money to? The same is true for any financial institution and this is usually why payment history is the most important scoring factor.
  • Credit Utilization. Your credit utilization is the amount you owe divided by the total amount of credit you have available to you. For example if you have one credit card (ridiculous I know) and it has a credit limit of $10,000 and you’ve used $1,000 of that limit your credit utilization will be 0.1 or 10%. The thought is that if somebody has used a high amount of the credit currently available to them then they are likely to be under financial strain or duress and more likely to default or become delinquent on their loans. It’s important to note that credit utilization traditionally has had no history (e.g credit scoring models will only care about what is currently being reported) but this is changing over time so expect utilization history to be more of a factor in the future.
  • Length of Credit History. This helps qualify the rest of your data. If you’ve never made a late repayment and you’ve had a credit card for 20 years then you’re less likely to be a risk than somebody with no late repayments who has had a credit card for six months. This usually incorporates other factors as well such as age of newest account, oldest account and average age of accounts.
  • Recent Searches For New Credit. Similar to credit utilization too many searches for new credit can be a signal that somebody is under financial duress and might be more likely to default/become delinquent on their loan obligations.
  • Types Of Credit Used. There are two types of credit: installment & revolving. An installment loan is where you borrow a fixed amount and pay back the loan over time (think mortgage or auto loan) and revolving credit is where you have a fixed credit limit and can use/payback the loan as you see fit (think credit card).

FICO Score

This is the most used credit scoring brand (I think the last official figures were that it was used in 90% of all lending decisions, but that data is somewhat old). Their scoring breakdown or weighting looks like this for the classic score:

  • Payment History: 35%
  • Credit Utilization: 30%
  • Length of Credit History: 15%
  • Recent Searches For New Credit: 10%
  • Types Of Credit Used: 10%

As I mentioned at the start there are different variations of the FICO score that are aimed at specific markets like credit cards, auto loans, mortgages etc. In general these use similar criteria but put more emphasis on those types of loans, for example an auto specific score would pay more attention to late installment loan repayments. Discover offers Credit Score Card and this provides a free FICO score (you don’t need to be a Discover cardholder). It’s also quite a common credit card benefit.


This is the second most used credit scoring brand and a brainchild of the three nationwide credit bureaus. VantageScore has never given specific weighting breakdown like FICO, instead they provide us with the following information:

Extremely Influential

  • Payment history

Highly Influential

  • Age & Type of Credit
  • % of Credit Used (also known as credit utilization ratio)

Moderately Influential

  • Total Balances/Debt

Less Influential

  • Recent Credit Behavior and Inquiries
  • Available Credit

Experian used to provide the exact breakdown on their website and it was as follows:

  • Recent credit: 30%
  • Payment history: 28%
  • Credit utilization: 23%
  • Credit balances: 9%
  • Depth of credit: 9%
  • Available credit: 1%

There are lots of sites that provide free VantageScores. One of the more popular sites is Credit Karma.

What You Should Do To Improve & Maintain Your Score

Once you understand how credit scores are calculated, what you should do becomes a lot clearer. Here are my tips:

  • Always pay your bills and repayments on time. You’re hopefully doing this anyway to avoid late payment and interest charges but remember that your payment history is the key scoring criteria for both of the major scoring models. If you’re forgetful then set up automatic repayments.
  • Keep your utilization low. It’s generally considered best to keep your credit utilization at 1-10%. Keep in mind that the credit utilization is based on what is reported to the three nationwide credit bureaus and they all have different reporting dates. This means even if you pay your balances in full every month you might be reporting a large balance. You can see what date card issuers report to the credit bureaus on Doctor of Credit.
  • Product change instead of canceling. Credit length is important so instead of cancelling a credit card with an annual fee why not see if there are any useful no annual fee options you can product change that card to instead? That will help keep your average age of accounts higher than cancelling would. (Note: Currently FICO allows closed accounts to continue to age on your credit report until they fall off after 7 years so this isn’t hugely important. I believe they will be making changes to this in the next scoring iteration as it doesn’t currently make sense from a risk perspective).

You can also try doing things like making sure you have both revolving and installment loans. Most readers will have lots of revolving credit reporting, but you can use something called the secured loan trick to get an installment loan reporting as well.

Questions On How Credit Scores Are Calculated?

Feel free to ask below and I’ll do my best to answer them. Obviously this is just an introduction how credit scores are calculated, and you should do your own research but hopefully this is helpful to some readers. Thanks again to Trevor for inviting me onto the blog. Credit scoring is actually why I originally started my own blog so it’s nice to share this sort of information!

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