What’s a Credit Score and How Is It Calculated?

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FACT-CHECKED
Published Dec. 16, 2022
Real estate agent explains the importance of credit scores to homebuyers in front of a house.

When deciding whether to approve you, mortgage lenders use your credit report and credit score to estimate how likely you are to repay a loan. Your score also affects the interest rate and other terms of any loans they offer you.

What Is a Credit Score?

Your credit score is a three-digit number that represents your credit history. It’s considered a predictor of how you’ll manage credit in the future. Scores range from 300 on the low end to 850 on the high end.

Borrowers with higher credit scores are viewed as less risky to lenders, and are more likely to get loans with a lower interest rate. Borrowers with lower credit scores are viewed as at greater risk to default on the loan, and typically are charged higher interest rates. Having very low credit can jeopardize your ability to get a loan at all.

Credit score minimums for different mortgages will vary.

How Is a Credit Score Calculated?

There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion. Each one compiles a credit report on you, which commonly includes information such as:

  • Loan amounts and credit limits.
  • Debt balances.
  • Payment history.
  • The ages of credit lines you have open.
  • Hard inquiries into your credit history.

Credit bureaus use scoring models — the most common are FICO and VantageScore — to calculate your credit score. It’s important to note that the credit bureaus collect different information, and each scoring model uses a different formula, so your scores will vary depending on what information is included and which scoring model is used.

Factors that affect your credit score

Credit scores are calculated using five weighted factors. Here’s how much each factor influences your score, using the FICO model:

  • Payment history (35%). The biggest factor in your FICO score is how diligent you’ve been about making your bill and debt payments on time.
  • Amounts owed (30%). The total amount of debt you have and the amount of credit you’re using also play a major role in determining your FICO score. Keeping your credit card balances under 30% of your credit limit helps improve your FICO score.
  • Length of credit history (15%). The more experience you have managing debt, the more you can prove that you’re capable of paying your bills on time.
  • Credit mix (10%). It can help to have multiple types of credit accounts to show that you’re able to manage different kinds of debt at the same time. 
  • New credit (10%). When you open a new line of credit, the lender checks your credit, and it shows up on your credit report as a hard inquiry. A hard inquiry can cause your score to drop a few points. Multiple hard inquiries over a short time may have a cumulative effect that can damage your credit score more seriously.

Factors that aren’t included in your credit score

When FICO or VantageScore calculate your credit score, they don’t consider factors such as:

  • Race.
  • Religion. 
  • National origin.
  • Sex.
  • Marital status.
  • Age.
  • Employment history.
  • Salary. 
  • Occupation. 
  • Location. 
  • Soft inquiries.

FAQ

Here are answers to some frequently asked questions about credit scores.

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