There are different ways that credit scores are calculated. Unfortunately, there is no agreed-upon method that all firms, credit unions, banks, etc., use to calculate credit. FICO and VantageScore are the most used models for credit scoring, but there are a few other scoring models. There are also a variety of scores made for specific purposes, such as purchasing a home or car. Learn ways to build credit in our article, 4 Ways to Build Credit Quickly.

FICO: One Way Credit Scores Are Calculated

The FICO score was created in 1989 to create a credit scoring model to make lending easier and unbiased. Classic FICO scores are calculated using payment history, credit utilization, credit history, types of credit, and new credit. This website goes more in-depth on FICO scores.

Requires More Attention

Payment history is 35% of the calculation. As long as you make payments on time and do not have any lawsuits, liens, bankruptcies, or foreclosures, you will score well in this part of the calculation. If your payments are late, it will affect your credit to the extent that it was late.

Credit utilization is 30% of your score. You should use a maximum of 30% of your credit limit, but it is best if you can keep utilization down to 10%. Using a maximum of 30% of your credit limit means that if you have a $1,000 limit, you should only spend $300.

Requires Less Attention

Credit history is 15% of your score. To make sure you score well in this category, you only need to make sure you make payments on time. This part of the score is something that you can only perfect over time.

Credit use is 10% of your score. This category is about the different types of credit you have. This can be credit cards, mortgages, auto loans, etc. This category is a little tricky because it wants you to have various types of credit, but you can’t apply for credit too fast, or it will be a red flag on your report. You can improve this category over time.

Last is new credit, which is 10% of your score. In this category, applying for a lot of new credit at one time will harm your score. It is best to apply for credit slowly. For example: You could get a secured credit card when you turn 18, and as you build credit, you should have the option to either change that card from secured to regular. Then maybe a couple years down the road, your credit might be enough to get a car loan. This adds to the variety of credit lines in your name and will increase your score (after the initial drop from the hard inquiry).

VantageScore: Another Way Credit Scores Are Calculated

The VantageScore was created in 2006 by the three credit bureaus (Experian, Equifax, and Transunion) to compete with the FICO credit score. This score uses payment history, age and type of credit, credit utilization, total balances, recent behavior, and available credit to calculate a score. These categories are weighted differently than in the FICO scoring model. NerdWallet goes more in depth on this scoring model here.

More Important to Focus On

Payment history has a high weight at 40%. With this category, you need to make payments on time. Any late payments will stay on your report for seven years, meaning they will continue to affect your credit for seven years. Fortunately, those late payments drop off your credit report after 7 years, which should raise your credit score.

The second category is age and type of credit. This category has medium-high weight at 21%. For this category, let’s say you have a good mix of credit with a 15-year-old mortgage, a 3-year-old car loan, and credit cards of varying ages, and you pay everything on time. You will do well in this credit category if you maintain a variety of different types of credit over a longer period of time.

Credit utilization also has a medium-high weight of 20% – similar to the last category. To calculate credit utilization, you divide your balances by your available credit. A rule of thumb for this category is to keep your utilization under 30%, but keeping it under 10% is even better. Having high utilization (more than 30%) will have a negative impact on your credit score.

Still Important, But They Have Less Impact

Total balances are the next category. It has a medium weight of 11%. This category counts your total debt, including current and delinquent accounts. For this category, lowering your total debt will increase your score.

Another category is “recent behavior”, which has a low weight of 5%. This category is about your new accounts and the number of hard inquiries you have. Keeping this number low will be better for your score. That means not opening new accounts very often – maybe once a year. Twice if absolutely necessary.

Lastly is available credit, which has an extremely low weight at 3%. This category is about the amount of credit you have available to use. Having more credit available to use can be good, as long as it fits with your reported income. Having too much available credit can impact your score negatively. The idea here is that having too much available credit makes a person riskier in the eyes of a lender. This person could attempt to use all of their credit and not be able to pay it back because they had too much available to them. This part of the scoring model has a low weight and cannot affect your credit score as much as the parts of this calculation.

Other Credit Scoring Models

There are other, less common credit scoring models. These include TransRisk, Experian’s National Equivalency Score, Credit Xpert Credit Score, CE Credit Score, and the Insurance Score. Then there are industry-specific credit scores. An example of this would be if you were looking for another credit card, the company would do a calculation based on your history with your other credit cards, and they may give you that credit card if you have a good history with credit cards.