What Is A Credit Score, And How Is It Calculated?

A credit score is a three-digit summary of how reliably you have repaid borrowed money. Lenders use it to decide whether to approve you and at what interest rate. Landlords, insurers, and some employers check versions of it too. The most common model, FICO, runs from 300 to 850.

The five factors

FICO weights five categories, and the weights are public:

• Payment history — about 35%. Do you pay on time?
• Amounts owed — about 30%. How much of your available credit are you using?
• Length of credit history — about 15%. How long have your accounts been open?
• Credit mix — about 10%. Do you handle different types of credit?
• New credit — about 10%. How many accounts have you opened recently?

Payment history is most of the game

More than a third of your score is one question: do you pay on time? A single payment reported thirty days late can drop a good score substantially and stays on your report for seven years. Payments less than thirty days late are usually not reported to the bureaus, though your lender will still charge you a fee.

If you do nothing else, automate the minimum payment on every account. It protects the largest component of your score against a bad week.

Credit utilization, the fast lever

Utilization is your balance divided by your limit. If you have a $1,000 limit and carry a $300 balance, you are at 30%. Lower is better, and this factor updates monthly rather than lingering for years — which makes it the quickest way to move your score.

A common misunderstanding: you do not need to carry a balance to build credit. Using the card and paying it off in full every month builds history without paying interest.

Why closing an old card can hurt

Closing a card removes its limit from your available credit, which raises your utilization, and eventually removes its age from your history. If an old card has no annual fee, keeping it open with occasional small purchases usually helps more than closing it.

Checking your own score

Checking your own credit is a soft inquiry and does not affect your score. Only applications for new credit create hard inquiries. In the United States you are entitled to free copies of your credit reports from the three major bureaus through AnnualCreditReport.com — the official source, not a lookalike.

Read the report itself, not just the number. Errors are common, and disputing an account that is not yours is one of the few ways to correct a score quickly.

This article is educational information, not personalized financial advice. For guidance specific to your situation, book a free consultation with our team.