How a FICO Credit Score Is Built From Five Factors

A credit score is a number that estimates how likely a person is to repay borrowed money on time. The best-known family of scores, FICO, is built from five groups of information in a credit report, and two of them, payment history and amounts owed, make up about two thirds of the result. This article explains each group in plain terms. It is general information about the United States system, not advice about any person's finances.

What a credit score is

According to the US Consumer Financial Protection Bureau (CFPB), a credit score is a number produced by a mathematical formula, called a scoring model, that takes the data in your credit report and turns it into a single figure. Most credit scores fall between 300 and 850, the CFPB says. A higher score generally makes it easier to qualify for a loan and can lead to a lower interest rate or better terms.

Lenders are not the only users. The CFPB lists mortgages, credit cards, car loans, tenant screening and insurance decisions among the places a score may be used.

You do not have just one score

People often talk about "my credit score" as if there were one. The CFPB says there is not. A score depends on which data is used, which scoring model is applied, where the data came from, and when the score was calculated. A lender may also use a different model for a car loan than for a credit card. This is why two apps can show two different numbers on the same day without either being wrong.

The five factors and their weights

FICO, the company behind the FICO Score, publishes the general weights on its consumer site, myFICO. The percentages describe the typical breakdown, and the exact effect on any one person depends on their whole report.

• Payment history, 35%. Whether you have paid past accounts on time.
• Amounts owed, 30%. How much debt you carry and how much of your available credit you are using.
• Length of credit history, 15%. How old your accounts are.
• New credit, 10%. Recently opened accounts and recent applications.
• Credit mix, 10%. The variety of credit types you hold.

Payment history

This is the largest factor. It records whether past accounts were paid on time. myFICO notes that a few late payments are not automatically a "score-killer", but it also says a clean record alone will not produce a perfect score, because the other factors count too.

Amounts owed

This factor looks at how much debt you have in total and how much of your available credit you are using. For example, if a card has a limit of 1,000 and the balance is 800, that card is using 80 per cent of its limit. According to myFICO, high usage can suggest a person is overextended. The same page says that having debt is not automatically a negative.

Length of credit history

myFICO says this factor considers the age of your oldest account, the age of your newest account, and the average age of all your accounts. It also looks at how long particular accounts have been open and how long it has been since certain accounts were used. A long history helps, but myFICO states that it is not required for a good score.

New credit

Each time you apply for credit, the lender usually checks your report, which creates an inquiry. myFICO says FICO Scores consider only inquiries from the last 12 months, although inquiries stay on the report for two years. Opening several accounts in a short time is viewed as riskier, especially when the credit history is short.

Credit mix

Credit mix is the range of account types: credit cards, retail accounts, instalment loans such as car loans, finance company accounts and mortgages. myFICO makes clear that you do not need one of each. It is the smallest group, tied with new credit at 10%.

Other items that can appear in a report

The CFPB adds that debts sent to collection, foreclosures and bankruptcies can affect a score, and that how long ago they happened matters. These show up through the payment and amounts-owed information in the report rather than as a separate factor in the FICO list.

Why the weights matter

Seeing the weights explains why some actions move a score more than others. Paying accounts on time and keeping balances well below limits touch the two largest groups. A single new application sits in a group worth 10%, and it only counts for 12 months. None of this predicts a specific change in a particular person's score, since each report is different.

The CFPB also points out that people can access their credit scores for free, so checking is usually possible without paying a fee. Which score a service shows, and which model it uses, is worth reading before comparing numbers.

Sources

• What's in your credit score, myFICO
• What is a credit score?, Consumer Financial Protection Bureau