What Is a Credit Score and How Is It Calculated

The credit score is a rating system that allows creditors to assess your credit risk at individual points in time. A low score indicates a higher risk client, while a high score indicates a low-risk client. According to the official website of FICO ®, you have a separate FICO score at each of the three credit bureaus, also known as credit reporters; Equifax, TransUnion, and Experian.

  • 780-850 – Low Risk
  • 740-780 – Medium-Low Risk
  • 690-740 – Medium Risk
  • 620-690 – Medium-High Risk
  • 620 and Below – High Risk or “subprime.”

How is a Credit Score Calculated?

Your credit score is generated from a statistical model used by creditors, applying a different weighted value to certain factors, these different variables have their own correlation, or relationship, with credit risk. In turn, this statistical analysis has allowed creditors to classify credit applicants numerically to determine their risk of extending credit.

However, it is important to highlight that different creditor will use different models, and the same creditor might use different models for different types of credit. So, this means that your credit score can be different, depending on the creditor and the line of credit you are looking to obtain.

Five Factors That Impact Your Credit Score

According to FICO’s official website on, “How to repair my credit and improve my FICO Scores,” there are five important factors that contribute to a credit score:

  1. Payment History: This makes up 35% of the calculated credit score and is, “the most important factor,” influencing your credit score. The first step to improve your credit score is going to be making timely and consistent payments.
  2. Amount Owed: This affects 30% of your FICO score, and when trying to increase your credit score is one of the best and most effective approaches that can be made. Make sure to keep balances low on credit cards and have as few as possible open accounts.
  3. Length of Credit History: The first detail, that should be understood is, “average account age,” because if you do not have a lot of pre-existing account information, this will influence your credit score by lowering your average account age. Therefore, it is best to avoid opening new accounts rapidly, in fear of insufficient account history. However, if you do not have a long credit history, that is okay! This can be offset by the first two credit score factors; timely payment history, and low balances.
  4. New Credit or Credit Consumption: Having too many credit accounts and inquiries can generate a negative impact on your credit score because it suggests financial trouble. Inquiries will not affect your credit score as much as new credit accounts. However, it is good to know that each of these inquiries remains on your credit report for two years, and in your FICO credit score for 12 months.
  5. Credit Mix: This factor can be considered the icing on the cake if you have been diligent and followed a well-regimented credit plan by not overextending your financial limits. Having different credit types, installments (mortgages and loans) and revolving credit (credit cards) demonstrates a “healthy mix.”

Building a solid foundation of credit practice, revolving around the most important factors, payment history and amount owed. Will allow you to work on less important but still crucial factors like the length of credit history and new credit or credit consumption. Overall, demonstrating well-structured and practiced credit etiquette, setting you up for a healthy credit mix and a high credit score.