How Do Credit Scores Work? A Simple Guide to Credit Scoring

A credit score takes information from your credit history and turns it into a number that helps predict how likely you are to repay borrowed money as agreed. The part that often causes confusion is that your credit score isn't calculated by a person sitting down and judging your financial life. A mathematical formula, known as a credit scoring model, processes information from your credit report and produces a score.

And there isn't just one formula. Different scoring models can use different versions of your credit information, which is why the score you see in one place may not be the same number a lender sees.

Key takeaways

• A credit score is calculated from information in your credit report using a credit scoring model.
• Different scoring models can produce different scores from the same credit history.
• Your payment history, debt, credit utilisation, account history and recent credit activity can all matter.
• FICO Scores group credit information into five major categories: payment history, amounts owed, length of credit history, new credit and credit mix.
• The percentages associated with FICO's categories are not a universal formula for every credit score.
• You can have multiple credit scores at the same time.
• Changes to the information in your credit reports can lead to changes in your scores.
• Checking your own credit information does not hurt your credit score.

How does a credit score work?

At its simplest, the process looks like this:

Credit activity → Credit report → Scoring model → Credit score

Your lenders and creditors report information about your accounts to consumer reporting companies. That information can include payment history, balances, credit limits, account history and other details. A credit scoring model then evaluates relevant information from your credit report and calculates a number.

The CFPB describes a credit score as a prediction of credit behaviour, such as the likelihood that you will repay a loan on time. It also explains that different scores can result from differences in scoring models, the data used, the type of credit being considered and even the date the score is calculated. So your score isn't a permanent rating attached to you. It is a calculation based on information available at a particular point in time.

What information is used to calculate a credit score?

The exact information depends on the scoring model, but credit scores can take several parts of your credit history into account. These may include:

• Payment history
• Current debt
• Credit-card balances
• Available credit
• Length of credit history
• Number and types of credit accounts
• Recent credit applications
• Collection accounts
• Certain public records

The CFPB identifies payment history, unpaid debt, account types, account age, credit utilisation and recent applications among the factors that can affect credit scores. That doesn't mean every scoring model weighs every item in exactly the same way. This distinction becomes important when you start comparing FICO Scores with VantageScore or different versions of the same scoring system.

What are the five main factors in a FICO Score?

FICO provides a useful framework for understanding how one major family of credit scores works. For base FICO Scores, the information is grouped into five categories:

These percentages describe the general FICO framework. They are not a universal recipe for every credit score, and FICO notes that the relative importance of categories can vary depending on a person's credit profile. Let's look at what those categories actually mean.

How does payment history affect a credit score?

Payment history is a record of how you've handled your credit obligations. It can include whether you've paid accounts on time and whether payments have been reported as late. For FICO Scores, payment history is the largest scoring category at 35%.

That doesn't mean every late payment has the same effect. Scoring models can consider factors such as the severity, recency and frequency of negative information. A recent serious delinquency can tell a different story from an isolated late payment from years ago.

The practical takeaway is straightforward, paying your accounts on time consistently gives your credit history stronger payment information to work with. If a credit report incorrectly says you missed a payment, however, that's a different issue. The problem isn't that the scoring model is being unfair; the problem may be that the information going into the calculation is inaccurate.

How do amounts owed affect a credit score?

Amounts owed refers to the debt shown in your credit history. For revolving credit, such as credit cards, one particularly relevant measurement is credit utilisation. Credit utilisation compares the amount you're using with the credit available to you.

For example, if you have:

• A $5,000 credit limit
• A $1,000 balance

your utilisation is 20%. If that same account has a $4,500 balance, utilisation rises to 90%. FICO considers amounts owed to be 30% of its general scoring framework. The CFPB also advises consumers to avoid getting close to their credit limits and notes that experts commonly recommend keeping credit use at no more than 30% of the total limit.

That doesn't mean 30% is a magic threshold where your score suddenly changes, and credit scoring is more complicated than that.

Does carrying a credit-card balance help your credit score?

No.

You do not need to carry debt from one month to the next to build a good credit history. In fact, the CFPB specifically notes that you don't need outstanding credit-card debt to have a good score. Paying your balance in full can also help you avoid unnecessary interest charges.

Using a credit card and paying it responsibly is very different from carrying a balance simply because you think doing so will improve your score, which it won't.

How does the length of your credit history affect your score?

Credit scoring models can look at how long you've been using credit. That can involve:

• The age of your oldest account
• The age of your newest account
• How long individual accounts have been open
• The average age of your accounts

FICO includes length of credit history as 15% of its general scoring framework. A longer history can give a scoring model more information about how you've handled credit over time. This is one reason opening and closing accounts simply to manipulate your score isn't necessarily a good idea. Your entire credit profile matters, not just one account.

How does new credit affect your score?

Recent applications for credit can also matter. When you apply for certain types of credit, a lender may make a hard inquiry to access your credit report. Several applications within a short period can therefore create multiple hard inquiries. That doesn't mean you should avoid applying for credit when you need it.

It means your recent credit activity is part of the information some scoring models evaluate. Some scoring models also treat certain multiple inquiries for rate-shopping differently, depending on the type of credit and the model being used. So the effect isn't as simple as "one application equals X points."

What is credit mix, and how does it affect your score?

Credit mix refers to the types of credit accounts in your history.

Your credit profile might include:

• Credit cards
• Auto loans
• Mortgages
• Personal loans
• Other instalment accounts

FICO includes credit mix as 10% of its general scoring framework. But this is not a suggestion to borrow money you don't need just to create a more diverse credit profile. Taking on unnecessary debt can cost far more than any potential scoring benefit.

Why do different credit scores exist?

This is where many people get confused, because you can have multiple credit scores because there are multiple scoring models and multiple sources of credit-report information. For example, a lender may use a FICO model designed for a particular lending product, while a consumer-facing financial app may display a VantageScore or another educational score.

The underlying credit information may also differ between Equifax, Experian and TransUnion. As a result, two scores calculated around the same time can legitimately be different. That doesn't automatically mean one score is wrong. It means the calculations aren't necessarily using identical inputs.

What is the difference between FICO and VantageScore?

Both FICO and VantageScore produce credit scores, but they are different scoring systems.

FICO Scores

FICO Scores are calculated using information from consumer credit reports and are available in multiple versions. Different FICO versions can be designed for different lending purposes. The commonly used FICO framework groups information into the five categories discussed above.

VantageScore

VantageScore is another credit-scoring system. Its current models also use a 300–850 range, but the way the models evaluate credit information differs from FICO. VantageScore 4.0, for example, uses its own scoring methodology and assigns consumers to credit tiers ranging from subprime to superprime.

So comparing a FICO Score and a VantageScore as though they were supposed to be identical numbers doesn't really make sense. They're different calculations.

Why can my credit score change even when I didn't apply for credit?

Your score can change because the information behind it can change.

For example:

• A lender reports a new balance.
• A payment is reported.
• An account is paid down.
• A new account appears.
• An account is closed.
• A collection account is added or updated.
• A previously reported delinquency becomes older.

Your credit reports aren't static documents. As the information changes, the score calculated from that information can change too. The CFPB notes that scores can differ depending on the data available and even the day on which the score is calculated.

Can a credit-report error change your credit score?

Yes. A credit score depends on information in a credit report. If that information is inaccurate, the score calculated from it can also be affected. Imagine your report shows:

Reported balance: $4,800Actual balance: $800

That difference could materially change the credit information being evaluated.

The same principle applies to other errors, such as:

• A payment incorrectly reported as late
• An account that doesn't belong to you
• A duplicate account
• An incorrect account status
• An inaccurate collection account

This is why checking your credit reports is not just a paperwork exercise. The quality of the information matters. If you want to understand the underlying document first, see how to read a credit report (internal link: How to Read a Credit Report).

Does checking my credit score lower it?

No. Looking at your own credit score does not create a hard inquiry simply because you checked it. The same applies to checking your own credit report. A consumer's request for their own report is treated as a soft inquiry and does not lower their credit score.

You should therefore feel comfortable monitoring your credit information. The thing that can affect your score is a hard inquiry associated with certain credit applications, not the act of checking your own information.

How can I understand why my credit score changed?

Start with the information behind the number. If your score moved significantly, review your credit reports and look for changes in:

• Account balances
• Payment history
• New accounts
• Credit limits
• Account status
• Collections
• Hard inquiries

Your score itself usually won't tell you the whole story, and the report gives you the context. And if you're seeing unfamiliar information, don't immediately assume that you need to "repair" your credit. First determine whether the information is accurate.

Does everyone have a credit score?

No. Having a credit history doesn't always mean a scoring model can produce a score for you. Scoring models have requirements around the amount and recency of credit information available. Someone who is new to credit, for example, may not have enough qualifying information for certain scores.

This is another reason the phrase "everyone has one credit score" is misleading. The more accurate way to think about it is that eligible credit information can be evaluated by different scoring models to produce different scores.

The bottom line

A credit score is the result of a calculation, not a permanent label.

Your credit history provides the information. A scoring model evaluates relevant parts of that information and produces a number. Change the information, use a different model, or calculate the score at a different time, and the number can change. That's why understanding how credit scores work is more useful than obsessing over one number.

If you want to understand your own score, start with the credit reports behind it. Look at your payment history, balances, accounts and recent activity. If something doesn't look right, investigate it rather than assuming the score itself is the problem.

Frequently Asked Questions