How Does a Credit Score Work? The Five Factors Explained

Editorial note: This guide is for general education, not individualized financial advice. We independently research every topic and cite our sources. Our editorial standards · How we make money.

Your credit score is one of the most influential numbers in your financial life. It helps determine whether you are approved for a credit card, auto loan or mortgage, and it strongly influences the interest rate you pay — which can mean thousands of dollars over the life of a loan. Yet many people are unsure how the number is actually calculated.

This guide explains where credit scores come from, the five factors that drive them, what counts as a good score and the common myths worth ignoring. When you are ready to take action, our companion guide on how to improve your credit score turns this knowledge into a plan.

Where your credit score comes from

A credit score starts with your credit reports. Three nationwide credit bureaus — Equifax, Experian and TransUnion — collect information from lenders about your accounts: balances, limits, payment history, when accounts were opened and more.

Scoring companies such as FICO and VantageScore then apply mathematical models to that report data to produce a number that predicts how likely you are to become 90 or more days late on a payment in the future. Lenders use that prediction, along with your income and other information, to make decisions.

Two important points follow from this:

1. Your score is only as accurate as your reports. An error on your report can drag down your score. Check your reports regularly at AnnualCreditReport.com and read our guide on how to read a credit report.
2. You have many scores. Different models, different versions and slightly different data at each bureau mean your scores can vary. That is normal.

Credit score ranges

Most widely used scores range from 300 to 850. FICO describes its ranges approximately as follows:

Lenders set their own cutoffs, so these are general guides. A mortgage lender and a credit card issuer may treat the same score differently.

The five factors behind a FICO score

FICO publishes the general importance of five categories for the general population. Individual weights vary depending on the rest of your credit profile, but the broad picture is consistent.

1. Payment history — about 35%

The single most important factor is whether you pay on time. Your report shows each account’s payment record, including late payments (typically reported once a payment is 30 days past due), collections, charge-offs, foreclosures and bankruptcies.

• Recent late payments hurt more than old ones.
• More severe delinquencies (60 or 90 days late) hurt more than 30 days late.
• Most late payments can remain on your report for up to seven years, but their impact fades over time.

Action: Set up automatic payments for at least the minimum due on every account.

2. Amounts owed — about 30%

This factor looks at how much you owe, especially relative to your available credit on revolving accounts like credit cards. That ratio is called credit utilization.

Utilization = total card balances ÷ total card limits

If you have $2,000 in balances across cards with $10,000 in total limits, your utilization is 20%. Scoring models look at your overall utilization and at individual cards.

Lower is better. Many experts suggest keeping utilization under 30%, and people with the highest scores often use under 10%. Importantly, utilization has no long-term “memory” in most models — pay balances down and your score can recover as soon as the new balances are reported.

Action: Pay balances down before the statement closing date, or make multiple payments during the month, so a lower balance is reported.

3. Length of credit history — about 15%

Scoring models consider how long your accounts have been open: the age of your oldest account, your newest account and the average age of all accounts, plus how long it has been since you used certain accounts.

Action: Keep your oldest no-annual-fee card open and use it occasionally so the issuer does not close it for inactivity.

4. New credit — about 10%

Opening several accounts in a short period can signal risk. Each application for credit typically generates a hard inquiry, which may lower your score by a few points for a short time. Hard inquiries remain on your report for two years, but FICO scores only consider inquiries from the last 12 months.

Rate shopping is treated differently. When you shop for a mortgage, auto loan or student loan, multiple inquiries within a short window are generally counted as a single inquiry, so comparing offers should not significantly harm your score.

Action: Apply for new credit only when you need it, and do your rate shopping within a few weeks.

5. Credit mix — about 10%

Having experience with different types of credit — revolving accounts (credit cards) and installment loans (auto, student, mortgage, personal) — can help slightly. This is the least important factor, and it is never a good reason to take on debt you do not need.

What is not in your credit score

Your credit score does not consider:

• Your income, job title or employer
• Your bank account balances or savings
• Where you live
• Your race, color, religion, national origin, sex or marital status (lenders are prohibited from using these under the Equal Credit Opportunity Act)
• Whether you receive public assistance
• Checking your own credit (a soft inquiry)
• Most prequalification checks (soft inquiries)

FICO vs. VantageScore

FICO scores are the most widely used in lending decisions, and there are many versions — including older versions that mortgage lenders have long used and industry-specific scores for auto lending and credit cards.

VantageScore was created by the three credit bureaus and is used by many free credit monitoring services. Recent versions also range from 300 to 850 and consider similar information, though the models weigh factors differently and can score thin credit files that FICO may not.

Do not worry if the free score you see in an app differs from what a lender pulls. Focus on the trend over time and on the underlying habits, which improve every score.

How lenders use your score

When you apply for credit, a lender typically:

1. Pulls your credit report and one or more scores (a hard inquiry).
2. Reviews your income, employment and existing debts.
3. Decides whether to approve you and at what rate — a practice called risk-based pricing.

If you are denied or offered worse terms based on your credit report, federal law generally requires the lender to send you an adverse action notice or risk-based pricing notice explaining the key factors and how to get a free copy of your report.

Common credit score myths

Myth: Carrying a balance improves your score. False. Paying your statement balance in full each month builds positive history without costing you interest.

Myth: Checking your score lowers it. False. Checking your own score is a soft inquiry with no effect.

Myth: Closing old cards helps. Often the opposite. Closing a card removes its limit, which can raise your utilization, and over time can shorten your credit history.

Myth: Paying off a collection removes it. Not necessarily. Paid collections can remain on your report, although some newer scoring models ignore paid collections or treat medical collections differently. Paying still matters for lenders reviewing your report.

Myth: Your score is the same everywhere. You have many scores across models and bureaus.

How long it takes to see changes

The bottom line

Credit scores reward two habits above all: paying every bill on time and keeping credit card balances low. Add time, apply for new credit sparingly and keep your reports accurate, and your score will take care of itself. Next, read how to improve your credit score for a step-by-step plan, or explore the rest of our credit hub.

This guide is part of our Credit & Credit Cards hub and our complete personal finance guide. Spot an error? Request a correction.