Debt & Credit

How Credit Scores Are Calculated (And How to Improve Yours)

5 min read

What a Credit Score Actually Measures

Your credit score is a three-digit number that predicts how likely you are to repay borrowed money. The most widely used model is the FICO Score, which ranges from 300 to 850. Lenders use it to decide whether to approve you for loans, credit cards, and mortgages—and what interest rate to charge.

The formula isn't a mystery. FICO weighs five factors, and each has a specific improvement playbook.

The 5 Factors, Ranked by Impact

1. Payment History (35%)

This is the heaviest weight for a reason: lenders care most about whether you actually pay your bills. Every on-time payment adds positive data; every late payment dings you. A single 30-day late can drop a 780 score by 90–110 points. The impact fades over time, but a missed payment stays on your report for seven years.

How to improve: Set up autopay for at least the minimum on every account. If you've missed a payment, call the creditor and ask for a goodwill adjustment—they may remove it as a courtesy. No missed payments in 24 months is the benchmark for "excellent" payment history.

2. Credit Utilization (30%)

Utilization is your reported balance divided by your credit limit, expressed as a percentage. If you have a $5,000 limit and a $1,500 balance, your utilization is 30%. The scoring models penalize utilization above 30%, and the best scores keep it under 10%.

Importantly, utilization has no memory—it resets each month when creditors report your new balance. This means you can fix high utilization in 30–45 days, unlike a missed payment that lingers for years.

How to improve: Pay down balances before the statement closing date (not just the due date). Ask for credit limit increases—this lowers utilization without reducing spending. Consider making multiple payments per month to keep the reported balance low.

3. Length of Credit History (15%)

This includes the age of your oldest account, your newest account, and the average age of all accounts. Older is better. A 15-year credit history signals stability.

How to improve: Keep your oldest credit card open, even if you never use it. Put a small recurring charge on it (like Netflix) and set autopay to keep it active. Avoid opening multiple new accounts in a short period—each new account drags down your average age.

4. Credit Mix (10%)

Scoring models reward having experience with different types of credit: revolving accounts (credit cards) and installment loans (auto loans, mortgages, student loans). This shows lenders you can manage multiple forms of debt.

How to improve: Don't take out a loan just for the mix. This factor improves naturally over time. If you've only ever had credit cards, adding a small secured loan through a credit union can help—but only if the interest cost is minimal.

5. New Credit Inquiries (10%)

Each time you apply for credit, a hard inquiry appears on your report. One or two inquiries have minimal impact. Several in a short window signal credit shopping and can drop your score by 5–15 points each. The exception: rate-shopping for mortgages, auto loans, and student loans within a 14–45 day window counts as a single inquiry.

How to improve: Space out credit applications by at least 6 months. When rate-shopping, keep all applications within the scoring model's deduplication window (14 days for older FICO versions, 45 days for newer ones). Soft inquiries—like checking your own score or pre-approval checks—don't affect your score at all.

Where to Check Your Score

AnnualCreditReport.com provides free weekly reports from all three bureaus (Equifax, Experian, TransUnion). Many banks and credit card issuers now offer free FICO scores in their apps. Monitor your report for errors—the FTC estimates 1 in 5 Americans has a mistake on their report that drags down their score.

The Bottom Line

Payment history and utilization drive 65% of your score. Nail those two, and the rest follows. If you're starting from scratch, give it 6 months of on-time payments and low utilization to reach 700+. A score above 760 qualifies you for the best rates on almost everything.