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How your credit score is calculated: Facts vs. myths

Woman looking at credit card and computer
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Our credit scores are typically reviewed whenever we make major financial transactions—buying a house, securing loans and credit cards, renting an apartment, purchasing a car, paying for insurance and more. It's an important figure in our financial portfolio.

But how is your credit score calculated?

How your FICO score is calculated

The most well-known credit score is the FICO score. FICO calculates your score using the following factors, in order of importance:

  • Payment history
  • Debt owed
  • Length of credit history
  • Types of credit used
  • New credit accounts

Let's explore each of these factors and how they blend to create your unique credit score.

Payment history makes up 35% of your FICO score

Whether or not you pay your bills and debts on time makes up 35% of your credit score. Paying your bills on time is the best way to improve this portion of your score: Late payments will bring down your score while consistently paying promptly will keep it high.

Lenders want customers who they think will pay back their loans on time, so a positive payment history means you're more likely to secure loans. If you notice that your credit report shows an overdue or missing payment, consider calling your creditor to see if they will remove it from the report if you can work out a payment plan.

  • Tip: One way to avoid missing due dates for recurring expenses, like loans (i.e. mortgage, car, student loans who report to credit bureaus), is to set up automatic payments from your bank account.

Debt owed makes up 30% of your credit score

How much debt you owe in relation to how much credit you have makes up 30% of your credit score. This figure is also called your debt-to-credit ratio or credit utilization. If you routinely use up all of your available credit—by maxing out multiple credit cards, for example—it can result in a poor debt-to-credit ratio.

To improve your credit utilization, work toward paying down your credit card debt. Generally speaking, the ideal debt-to-credit ratio is no higher than 30% for each account. Let's say you have a credit card with a $2,000 credit limit. That means you should aim to carry a balance owed of no more than $600 in any given month. So, your first goal should be working toward that 30%. Then work toward paying them off monthly.

  • Tip: You can also call your creditors and ask for a credit line increase as you work to pay down your balances. Raising your credit allowances can help lower your overall debt-to-credit ratio, which is what lenders want to see.

Length of credit history makes up 15% of your credit score

How long you've had established credit makes up 15% of your credit score. Maintaining long-running accounts shows lenders you are good at managing debt long term.

This is one area where you can't actively improve your score other than maintaining positive habits and waiting for time to pass.

Types of credit used makes up 10% of your FICO score

The types of credit you currently have, also called diversity of credit or credit mix, make up 10% of your score. Having various types of accounts—mortgages, car loans, student loans and credit cards—signals to lenders that you can handle different types of debt.

You can diversify your credit in a couple of ways. If you don't already have one, a credit card can add another type of account to your report. And getting a car loan or mortgage will show lenders you can handle balancing payments from multiple sources of debt while still being financially responsible.

  • Tip: Don't apply for different lines of credit simply to have them. However, if you're in a financial position to either buy a car outright or set up a loan, consider setting up the loan if you are looking to improve your score for for credit diversity.

New credit accounts in the last 6 months make up 10% of your credit score

The final 10% of your credit score factors in how many new accounts you opened in the past six months. You may have heard of "hard inquiries," which is when a creditor formally runs your credit report. Hard inquiries typically only occur when you are about to open a credit account (loan, credit card, mortgage, etc.), so they shouldn't happen often.

Experian says that people who have several inquiries on their credit reports in a short period are more likely to overextend themselves and default on their debts. This isn't a good signal to creditors, so it's important to not take out too many lines of credit at once. You'll want to make sure there's some time in between when you apply for loans and credit cards. The general consensus is about six months.

  • Tip: Not only do multiple hard inquiries look bad to creditors, but they also affect your credit score. For example, one inquiry can decrease your credit score by about five points. Multiple inquiries in a short period may have a compounding effect.
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Common credit score myths

Does checking your credit score lower it?

No, checking your credit score does not lower it. Your bank account, credit card company or favorite budgeting app might offer a credit score tracking service—these are harmless. They are pulling "soft inquiries," which do not affect your overall score.

Further, you are entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) every year at This free report is what creditors see when they pull hard inquiries, so it's worthwhile to look into it annually.

Checking your score will help you see where you stand and identify potential problems. It also allows you to track your progress if you're working to improve your score.

Is your credit score affected when someone else checks it?

When you apply for a loan or credit card, the lender will most likely want to run a hard inquiry on your credit report and score. As mentioned, a single hard inquiry may decrease your credit score by less than five points, according to FICO. But the drop is only temporary—about a few months.

Ask ahead of time if the person checking the score will be doing a hard inquiry and if there's any way to avoid it. If you're applying for an apartment lease, for example, ask if your annual free credit report can suffice and then send it their way.

Do you need to keep a balance on your credit card to improve your credit score?

No, you do not need to keep a balance on your credit cards to either improve or maintain your score. In fact, it is best to pay off as much debt as possible each month so that you don't have to pay interest or fees.

As mentioned, your credit utilization ratio should be lower than 30%. So, in this case, a zero balance is just as valuable as a low balance. You don't need to always owe something on your cards for the utilization to register. Paying off your balances regularly if you're able won't hurt your score.

Improvement in your credit score over time

Now that you know how FICO calculates your credit score and how to improve each category, you might wonder how long it takes to improve a credit score. There is no one-size-fits-all answer to this question because so many factors make up your score.

However, by following some best practices, like paying your bills on time and keeping your debt levels low, you'll likely notice changes in your score relatively quickly. You could see improvement in as little as one month depending on how aggressive your efforts are. For most people, though, it takes a few months or even a year for more significant changes to occur.

Staying positive and proactive will help get you closer to your goal of having excellent credit.