How Credit Scores are Determined



Given the secrecy of the exact formulas used, it is impossible to say for certain how credit scores are calculated. However, as indicated by FICO as a guideline, credit scores are determined by looking at 5 key elements of a credit report: payment history, credit utilization and balances owed, longevity of credit history, diversity of credit, and new credit.

Payment history determines about 35 percent of a person’s FICO score.  Ensuring payments are made on time, avoiding bankruptcy, and keeping up with debt will make a credit and payment history stand out, helping boost a score and make it desirably higher.

An existing credit balance can be a good thing, but the higher it sits, the more it can affect the FICO score.  The amount you owe on a credit account determines about 30 percent of the FICO score.  The scores look at all existing amounts on balances, the number of balances, and the percentage of available credit used.  The ratio of the amount owed to the total credit limit determines this portion.

The length of the credit history on a person’s account helps to determine about 15 percent of the FICO score.  In general, the longer the history, the better the score.  This isn’t extremely important though, as long as all the other factors show fiscal responsibility.

New credit and a few other factors like diversity of credit help determine about 20 percent of  the FICO credit score.  Opening new lines of credit can affect credit scores for the better, or worse, as compared to the rest of the credit history.

When looking to increase your level of available credit, it is better to search in a short amount of time, as each search will appear on your report.  Multiple new credit searches spread over an extended period of time can give lenders the impression that the person is a desperate credit buyer, indicating financial difficulty.  Given that credit scores are not the only measure of a person’s risk, lender’s judgment can be just as important.