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How is a Credit Score Calculated? » Understanding Your Credit Score » How is a Credit Score Calculated? 



Most adults understand the importance of a credit score. They know it impacts their ability to borrow money for a home or finance a new car. However, not everyone knows how credit scores work and how they’re calculated. This is vital information because it can help improve your score.

Your credit score is a three-digit number that tells lenders whether it’s a good idea to give you credit or not. Credit bureaus use credit scoring models to calculate your score, so it’s done in the fairest way possible. Some credit scoring models you may be familiar with are FICO and VantageScore.

Common metrics these models use are payment history, credit history, how much of your available credit you use, and the types of credit you have, among other things. Since there are so many types of models, you can have different credit scores, depending on who you check with.

If you’re in the process of improving your finances, this information can help you boost your score and plan ahead when using credit cards and other forms of financing.

What is a credit scoring model?

A credit scoring model [1] is an unbiased way for lenders to determine whether they should lend you money. They calculate the risk of you defaulting on loans or paying credit card balances.

The models are developed internally by credit bureaus (companies that provide your credit reports), or externally by companies like FICO. The three largest credit bureaus in the U.S. are Experian, TransUnion, and Equifax. Together, they created the VantageScore model.

How do scoring models work? They use statistical analysis to estimate how risky of a borrower you are. Note there isn’t a single credit scoring model; there are many. That’s why you may notice you have different scores depending on which scoring model you use.

Even the same scoring model may vary, depending on which credit report it uses to pull information from. For example, your TransUnion FICO score may be different from your Experian FICO score.

The two major scoring models used are FICO and VantageScore, but there are others which you’ll learn about below.

What are the factors?

Knowing the factors that influence how your credit score is calculated can help you make better financial decisions. Here are the most common credit score factors and a brief description of each.

Payment history: The number one factor that determines your credit score is your payment history. This refers to whether or not you pay your minimum payments on time. When you miss payments or pay more than one billing cycle after the due date, it can have damaging effects on your score.

Credit utilization: Every credit card gives you a limit, which is the maximum amount of money you have access to. The closer to your limit you spend, the higher risk lenders see you as. Finance experts recommend spending 30% or less of your available credit to maintain a good credit score.

Credit history: The length of time you’ve had a card or loan affects your credit score, too. Longer credit histories with consistent on-time payments show lenders you know how to borrow responsibly.

Types of credit: Mixing up the types of credit you have can help better your score. Scoring models take into account whether you have a mix of credit cards, auto loans, student loans, and home loans, or just a single type of credit.

New credit: How often you apply for new cards can affect your score. Although there’s nothing wrong with applying for new credit, applying too often is a red flag for lenders. Why? Lenders may assume you’re in financial trouble or are on a spending spree. You should space out new credit applications to reduce the hit it takes on your score.

FICO Models

FICO is short for Fair Isaac Corporation, an analytics company that provides various products and services to businesses.[2] They were the first company to develop a credit-risk model with a score, hence their score is the most widely used.

A basic FICO score ranges from 300 to 850, while industry-specific scores range from 250 to 900.

Here are the variables used to measure your credit score with a FICO model:

Payment History35%
Amounts Owed30%
Length of Credit History15%
Credit Mix10%
New Credit10%

Various FICO Models

Credit scoring companies update their scoring models regularly. Why? Because lenders are always looking for better ways to assess risk. It’s important to know about different models, as each update impacts your credit score differently.

FICO has a range of models; they typically do updates every five years or so. So far, there is FICO 2 through FICO 10; the 8th model is most widely used, especially for auto and bankcard lending.

The primary differentiator between FICO 8 and other variations is that it is more sensitive than previous models about credit card utilization. Therefore, it’s suggested you use less than 30% of your available credit. FICO 8 also doesn’t factor in balances under $100 and shows grace if you have a one-off late payment.

Mortgage lenders and banks mostly use version 2, 4, and 5 as they’re less critical on high balances and credit utilization. The latest versions such as FICO 9, 10 and 10T are less pervasive. These scores give less “weight” to medical collections and look for trends in how you use credit.


In 2006, VantageScore was introduced by Equifax, TransUnion, and Experian. The good thing about VantageScore is they give you information about your score. You’ll find reason codes that provide a detailed explanation and suggestions for how you can improve it.

What is the primary difference between a FICO and VantageScore? They include credit card and loan balances as well as available credit.[3] They also merge age and mix of credit into one category. Another difference is to create a credit score with FICO, you need an account that’s at least 6 months old. VantageScore, however, can create a score as long as you have an account.

Like FICO models, Vantage also has a variety of models; 1.0, 2.0, 3.0, and 4.0 which is the latest version. Unlike with FICO, anything from 700 is regarded as good credit, while below 639 is poor. Two characteristics of VantageScores you should know is they judge late payments differently and are less harsh about hard inquiries.

Payment History41%How often you pay on time holds the most weight when it comes to VantageScore. Paying late could negatively impact your score for up to 7 years.
Age/Mix of Credit20%Having a mix of credit types works in your favor with this scoring model. For instance, paying a 30-year mortgage and paying credit card balances on time will improve your score.
Utilization20%Using less than 30% of your available credit each month will strengthen your score..
Available Credit2%This factor simply refers to the credit you haven’t spent or how much credit you have access to.
New Credit11%Every time you apply for new credit, you’re likely to get a hard inquiry on your report. Too many of these doesn’t sit well with lenders.

Other Models

Aside from the two models above, there are other types of credit scoring models.[4] Each model produces different types of credit scores, depending on what it’s needed for.

Some are industry-specific, meaning they’re tailored to calculate the risk of individuals defaulting on a specific type of loan or credit. For instance, a landlord may want to know more about evictions as opposed to what your credit card balances are. For this reason, the credit score you see on free credit reporting sites is likely different from the one that a lender,
landlord, or service provider may pull when assessing customers.


Lenders within the retail industry check how often you return and exchange items when assessing your suitability for credit. Product return and exchange fraud and abuse can lead to denied applications, so beware and check your credit report for any discrepancies.


For those who own rental properties, ResidentScore may be appealing. It was introduced by TransUnion and SmartMove to assist those in the tenant screening market. It would be beneficial to use this, as it is designed to measure the risk of eviction. It takes a closer look at past evictions and can assess prospective tenants with only one file on their account. Factors this score takes into consideration are evictions and insufficient funds.

TransUnion Account Management Model

This scoring model is geared toward helping institutions manage existing accounts. For instance, they may want to assess which account holders are most profitable and the likelihood of them becoming delinquent. There is also the

TransUnion new account score,[5] which helps lenders assess the risk of prospective borrowers. This model ranges from 300 to 850 and has reason codes to give you more information about your score.

Insurance Score

Insurance scores use their own scoring models to determine your creditworthiness. It’s calculated from the information on your credit report to predict future risk. An insurance score differs from a credit score as it focuses on your likelihood of getting in an accident or you filing an insurance claim, not your ability to repay borrowed money.

You’ll find your insurance score ranges from 200 to 997; a score of 770 or higher is considered good.

Experian’s National Equivalency Score

This credit score is used by financial institutions and available on free credit score website
Credit Sesame. It evaluates loan and credit applications and also helps institutions identify opportunities to upsell or offer new products to existing customers. It ranges from 360 to 840.

Check and Bank Reports

Banks as well as credit unions use specific scoring models, such as ChexSystems, to decide if it’s a good idea to let you open a checking account or cash a check. Unpaid overdrafts and fraudulent account activities are examples of factors that could hurt your score in this case.

Keeping your credit score as high as possible

Review your credit report once or twice a year to ensure it’s accurate and there isn’t any false information on it. Know that you have rights and you can dispute negative items on your credit report, especially if they are no fault of your own.

You can also use your understanding of scoring models to bump your score as much as possible.

  • Do not miss any payment by more than 30 days to avoid hurting your score
  • Keep credit card balances below 30% of the available limit
  • Space out new credit applications by at least 6 months
  • Keep old accounts open and active to avoid hurting your score
  • Strive for a mix of different types of loans and credit cards

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