How Do Credit Scores Work?
Think of a credit score as the output of a calculation. Your credit report contains information about your credit accounts and payment history. A credit scoring model analyzes that information and produces a numerical score.
The important distinction is that a credit bureau does not simply decide your score. Credit reporting companies maintain credit-report information, while scoring companies develop models that use that information to calculate scores.
What Information Goes Into a Credit Score?
Credit scoring models generally use information contained in a consumer credit report. The exact information and weighting depend on the particular scoring model.
Common information includes payment history, balances, credit limits, account age, types of accounts, collections, public records where applicable, and recent applications or inquiries.
Credit score vs. credit report
A credit report is a detailed record of credit-related information. A credit score is a numerical calculation based on information in a report using a particular scoring model.
The Main Factors That Affect Credit Scores
There is no single universal formula for every credit score. However, several categories appear repeatedly across major scoring systems.
Payment History
Major factorPayment history looks at whether you have paid credit obligations as agreed. Late payments, defaults, collections and other negative payment information can affect scores.
For FICO Score models, payment history is generally the largest category in the commonly published FICO Score factor framework.
Amounts Owed and Credit Utilization
Major factorScoring models can consider how much debt you have and how your revolving balances compare with your available credit.
Credit utilization is especially relevant to revolving accounts such as credit cards.
Credit utilization formula
Credit utilization = total revolving balances ÷ total revolving credit limits × 100
For example, $1,500 in credit card balances against $6,000 in total credit limits equals 25% overall utilization.
Lower utilization is generally favorable, but there is no single percentage that guarantees a particular score.
Length of Credit History
HistoryCredit scoring models can consider the age of your accounts and how long you have been using credit.
Depending on the model, factors can include the age of your oldest account, newest account and the average age of accounts.
A longer credit history can provide more information about how you have managed credit over time.
New Credit and Hard Inquiries
Recent activityApplying for credit can generate a hard inquiry when a lender reviews your credit report for a credit application.
A single hard inquiry generally has a relatively small effect on a score, but multiple recent applications can be more significant depending on the scoring model and the rest of your credit profile.
Some scoring models also have special treatment for multiple inquiries associated with rate shopping for certain types of loans.
Credit Mix
Model dependentSome scoring models consider the types of credit accounts in your profile. These can include revolving credit cards and installment accounts such as auto, student or mortgage loans.
Credit mix can contribute to a FICO Score, but you generally should not open accounts you do not need just to create a particular mix of credit.
How FICO Scores Work
FICO is a credit-scoring company whose models are used by lenders and other businesses. FICO scores are calculated from information in a consumer credit report.
A commonly discussed FICO Score framework uses five broad categories: payment history, amounts owed, length of credit history, new credit and credit mix.
| FICO Score category | Commonly published FICO Score 8 weighting | What it generally considers |
|---|---|---|
| Payment history | 35% | Whether accounts have been paid as agreed and negative payment information. |
| Amounts owed | 30% | Debt levels, balances and revolving credit utilization. |
| Length of credit history | 15% | The age and history of credit accounts. |
| Credit mix | 10% | Different types of credit accounts. |
| New credit | 10% | Recent applications, inquiries and newly opened accounts. |
How VantageScore Works
VantageScore is another major U.S. credit scoring system. It was developed by the three nationwide credit reporting companies: Equifax, Experian and TransUnion.
VantageScore models use information from credit reports but do not use exactly the same calculation as FICO. That is one reason a consumer can see a different FICO Score and VantageScore even when the underlying credit information is similar.
VantageScore models can consider payment history, age and type of credit, credit utilization, balances, recent credit activity and other credit-report information. The relative importance of these factors differs from the FICO framework.
FICO Score
FICO provides multiple scoring models, including base scores and industry-specific versions.
Different FICO versions can be designed for different lending situations.
VantageScore
VantageScore provides another family of credit scoring models used with information from consumer credit reports.
Its models can evaluate credit information differently from FICO.
Why Do I Have Different Credit Scores?
Having different credit scores does not necessarily mean one of them is wrong. Your score can differ because the underlying data, scoring model or timing is different.
| Reason | Example |
|---|---|
| Different scoring model | A FICO model and a VantageScore model can calculate different numbers from similar information. |
| Different credit bureau | One report may contain information that another report does not yet show. |
| Different model version | A lender may use a newer or industry-specific scoring model. |
| Different reporting date | A recently reported balance or payment may appear at different times. |
| Different lending purpose | Mortgage, auto and credit-card applications may use different scoring models. |
When Does a Credit Score Update?
Credit scores do not necessarily update on one universal monthly date. Creditors can report information to credit reporting companies at different times.
When the information in a credit report changes, a score calculated using that report can also change. For example, a newly reported credit card balance can affect the utilization information used by a scoring model.
The exact timing depends on when your creditor reports the information and when a score is generated.
How Credit Inquiries Work
Credit inquiries are requests to access your credit report. They are generally divided into two broad categories: soft inquiries and hard inquiries.
Soft inquiry
Checking your own credit report or score is generally a soft inquiry. Soft inquiries do not generally affect your credit score.
Hard inquiry
A lender may perform a hard inquiry when you apply for credit. Hard inquiries can affect some credit scores.
The treatment of inquiries varies by scoring model. Some models also account for rate-shopping behavior for certain installment loans.
What Does Not Directly Determine Your Credit Score?
Credit scores are based on specific information used by a scoring model. They are not a general measure of your entire financial life.
For example, your income and savings balance are not generally components of traditional credit scoring models. Someone can have a high income and poor credit, or a modest income and strong credit history.
Personal characteristics such as race, gender and marital status are also not used in traditional credit score calculations.
How Understanding Credit Scores Can Help
Understanding the scoring process makes it easier to focus on actions that can actually affect your credit profile.
- Pay credit obligations on time.
- Keep revolving balances manageable.
- Review your credit reports for inaccurate information.
- Avoid unnecessary credit applications.
- Maintain accounts responsibly over time.
- Do not open accounts solely to create a particular credit mix.
These habits are more useful than trying to predict exactly how many points a single action will add. Credit scoring models evaluate your overall credit profile, and the same action can have different effects for different consumers.
Example: How a Credit Score Can Change
Imagine someone has several credit cards with a combined $10,000 credit limit and $7,000 in revolving balances. Their overall utilization is 70%.
If that person pays the balances down to $2,500, their utilization falls to 25%.
Before
$7,000 ÷ $10,000 = 70% utilization
After
$2,500 ÷ $10,000 = 25% utilization
If the lower balances are reported to the credit bureaus, the scoring model will have different utilization information to evaluate. The exact score change cannot be predicted from utilization alone because the model also considers the rest of the credit profile.
Important Things to Remember
- There is no single universal credit score.
- Different scoring models can produce different scores.
- Different credit reports can contain different information.
- Many commonly used consumer scores range from 300 to 850.
- Payment history and amounts owed are important factors in commonly used scoring models.
- Lower credit utilization is generally favorable.
- Hard inquiries can affect some scores.
- Checking your own credit generally does not lower your score.
- Credit scores can change when the information used to calculate them changes.
- A credit score is only one part of a lender's decision.
Related Credit & Debt Guides
Frequently Asked Questions
How are credit scores calculated?
Credit scores are calculated by applying a specific scoring model to information in a credit report. The model evaluates factors such as payment history, balances, credit utilization, account history and recent credit activity, depending on the model.
What are the main factors in a credit score?
Major scoring models consider factors such as payment history, amounts owed or credit utilization, length of credit history, new credit and, depending on the model, credit mix.
Why are my FICO Score and VantageScore different?
FICO and VantageScore use different scoring models. Differences can also result from the credit report being analyzed, the model version and when the information was reported.
How often does a credit score change?
A score can change whenever the information used by the scoring model changes and a new score is generated. Creditors report information at different times, so there is no single universal monthly update date.
Does paying a credit card balance change your score?
It can. Paying down a revolving balance can reduce reported credit utilization. If the lower balance is reported and used by a scoring model, the resulting score may change.
Does checking my credit score hurt my credit?
Checking your own credit score generally does not hurt your credit because consumer self-checks are generally treated as soft inquiries.
Is there only one credit score?
No. You can have multiple credit scores because lenders may use different scoring models, credit reporting companies may have different information, and different model versions may be used for different lending purposes.
Is a credit score the same as a credit report?
No. A credit report contains detailed information about your credit history, while a credit score is a numerical calculation based on information in a credit report.