• How is My FICO Score Calculated?

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Reader Question: "I am confused by all of the different things that influence my credit score. I'm talking about my FICO number in particular. That's supposed to be the most important one, right? How is my FICO score calculated, and what can I do to keep the number high?"

    Your FICO credit score is calculated based on five categories of information. This information is pulled from your credit reports, which are produced by TransUnion, Equifax and Experian. These reports show how you have borrowed and repaid money in the past. So your borrowing habits are used to calculate your FICO score. 

    We'll get into the nuts and bolts of how your score is calculated in a moment. But first, I want to address the other question you asked: Is the FICO score the most important one?

    Why Your FICO Score Matters

    According to Farnoosh Torabi, a personal-finance author and contributor to CBS MoneyWatch, most mortgage lenders prefer the FICO score to other scoring models. About 90 percent of lenders use it. This three-digit number helps them measure the risk associated with a certain borrower. So you might call it the "score of choice" in the home-financing industry.

    When you apply for a mortgage loan (or a student loan, car loan, etc.), the lender wants to know how likely you are to repay the debt. They obviously can't predict the future. But they can learn from the past. And that's what your FICO score represents -- the past. It's a numerical representation of your borrowing history.

    If you have borrowed and repaid money responsibly in the past, you'll have a good credit score and a better chance of getting a loan. If you have a pattern of late payments, debt collections and the like, you'll have a lower score and a higher likelihood of being rejected.

    How It Gets Calculated

    The chart below shows the five categories of information used to calculate your FICO score. Each of these items has a different amount of "weight" or importance. Your payment history, for instance, counts the most toward your credit score. The rest of the chart speaks for itself.

    FICO Score Chart
    Chart: How your FICO score is calculated

    Let's recap. The information used to produce your score comes from your credit reports. These reports are basically a history of borrowing -- they show how you have borrowed and repaid money in the past. All of this data falls into one of the five categories shown above. This is how a FICO score gets calculated.

    Now let's take a closer look at those five categories:

    Payment History = 35% -- Paying your bills on time is the key to a good credit score. You've probably heard this before. Granted, it's not the only thing that determines your FICO score. But it is one of the most important factors. You can see this just by looking at the chart above. More than one-third of your FICO score is calculated from your payment history. In particular, I'm talking about the "bills" that show up on your credit report (auto loans, student loans, credit cards, mortgages, etc.). Pay these things on time, and your score will be fine.

    Amounts Owed = 30% -- This is the second-most influential item on the list. It accounts for 30 percent of your overall score. The buzzword in this category is "credit utilization ratio." This is the amount of your available credit limit that you're currently using. If I have two cards with a combined limit of $10,000, and my combined balance on both cards is $5,000, then I'm using half of my available credit limit. Thus, my utilization ratio is 50 percent. Your FICO score is calculated with this ratio in mind. A higher ratio will hurt your score. A lower ratio will help it. So there's a good chance you could boost your score just by reducing your balances.

    Length of Credit History = 15% -- You have plenty of control over the first two items on this list. You can pay your bills on time, and you can pay down the balances on your credit accounts. But there's not much you can do about the length of your credit history. It is what it is. Chances are, your history started when you applied for your first credit card or took out your first loan. Generally speaking, a longer history will result in a higher score. But this factor doesn't weigh heavily as the first two items above.

    New Credit Accounts = 10% -- Your FICO score is also calculated based on recent credit activity. This includes any new accounts you've opened recently, as well as any recent credit inquiries. This factor only accounts for 10 percent of your total score. If you apply for a bunch of new credit accounts in a short period of time, you may end up damaging your score. "Rate shopping" for a loan is a different story. The FICO scoring model is designed to recognize rate shopping for a single loan, so you shouldn't be penalized for it.

    Types / Mix of Credit = 10% -- This includes the different types of credit accounts you currently have (retail accounts, installment loans, credit cards, mortgage, etc.). In general, a broader mix of accounts will help your score.

    This is a simplified explanation of how a FICO credit score is calculated. Scoring models are incredibly sophisticated. They are revised, updated and "tweaked" all the time. But there's no need to wander too far into the weeds. If you want to maintain a good score, you should focus on the first two items on this list. Pay all of your bills on time. Keep your balances low. These two factors alone account for 65 percent of your total score calculation.