How Is Credit Score Calculated?

Your credit score plays a crucial role in both your everyday life and how you plan for the future. This important metric helps lenders determine your creditworthiness, impacts the interest rates you receive, and can even influence job opportunities or rental applications.

Understanding how your credit score is calculated allows you to make informed decisions that ultimately improve your financial well-being and helps you achieve your goals. Below, find the information you need to know about credit score calculations and what you can do about the factors involved.

What Is a FICO Score?

The most widely used credit score system in the US is the FICO Score, which gets its name from the Fair Isaac Corporation, who developed it. FICO Scores range from 300 to 850, giving lenders an immediate indication of how you handle credit and your risk level. A higher score indicates lower credit risk, often leading to more favorable lending terms.

FICO Scores are usually rated as follows:

• Poor: 300–579 (high risk)
• Fair: 580–669 (moderate risk)
• Good: 670–739 (low risk)
• Very Good: 740–799 (low risk)
• Exceptional: 800–850 (very low risk)

FICO Scores are used by the majority of lenders and are based on information found in your credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion.

What Factors Are Used to Calculate Credit Scores?

FICO Scores use five key factors to calculate your final credit score. Each element carries a specific weight (shown below as a percentage), and understanding these credit factors can help you develop good spending and credit habits, which will ultimately lead to good credit scores.

Payment History (35%)

Your payment history is the most important factor in your credit score. This includes records of on-time payments, late payments, defaults, and any accounts sent to collections. Lenders want to see a reliable track record of payments—missing even a single payment can significantly hurt your score.

Only accounts that report to the credit bureaus will show in your payment history. Credit cards, personal loans, retail store accounts, and mortgage loans are all examples that typically report to the credit bureaus. Utility and telecom accounts, conversely, typically don’t report unless your account becomes delinquent to the point of being sent to collections.

Amounts Owed (30%)

Your amounts owed reflects your credit utilization ratio: the percentage of your available credit that you’re currently using. A lower ratio typically indicates responsible credit usage. It tells lenders that you can manage your spending and pay down your balances on time.

It’s a good idea to keep your credit utilization below 30 percent across all accounts to maintain a healthy score. Going above this is an indication that you’re relying on your credit to make purchases and payments more frequently than you should.

Length of Credit History (15%)

A longer credit history provides more data to show your financial habits over time. This includes the age of your oldest account, your newest account, and the average age of all your accounts.

Keeping older accounts open and in good standing can positively influence this component, and this is a good reason to keep accounts open once they’re paid in full rather than closing them.

Credit Mix (Installment Credit vs. Revolving Credit) (10%)

Your credit score also considers your credit mix: the variety of credit types you use. A balanced mix of different account types shows lenders you can manage different forms of credit responsibly.

A good credit mix requires having both revolving and installment credit accounts. Revolving credit provides a credit limit you are allowed to borrow up to. You can then repay the debt, and borrow up to the limit again, should you choose. Examples of revolving credit include the following:

• Credit cards
• Retail store credit accounts
• Personal line of credit
• Home equity line of credit (HELOC)

Installment credit, on the other hand, allows you to borrow money in a lump sum, which you repay through regular, fixed installment payments. These are a few common examples of installment credit:

• Mortgage loans
• Personal loans
• Student loans
• Auto loans

New Credit (10%)

Opening several new accounts in a short time period can signal risk and may temporarily lower your score. This includes the number of recent credit inquiries and newly opened accounts. Responsible and limited use of new credit is essential for maintaining a good score.

What Doesn't Impact Credit Score?

There are several factors that do not affect your credit score, even though they may seem relevant. When applying for credit or a loan, lenders might still ask you for this information and use it in making their decision, but it does not impact your credit score:

• Income
• Employment status or history
• Marital status

Does Bankruptcy Impact Credit Score?

Yes, bankruptcy has a significantly negative impact on your credit score. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, while a Chapter 13 stays for up to seven years. However, bankruptcy’s impact lessens over time, especially if you practice good credit habits after it’s discharged and focus on rebuilding your credit.

How Do Hard and Soft Inquiries Impact Credit Score?

Credit inquiries occur when someone checks your credit report. There are two types:

• Soft inquiries do not affect your credit score. These occur during pre-approvals or when you check your own credit.
• Hard inquiries may lower your score by a few points. These happen when a lender reviews your report to approve a loan or credit card. Multiple hard inquiries in a short timeframe can have a greater effect, especially if they’re not for the same type of loan (such as multiple mortgage applications, which are usually grouped together).

Limiting hard inquiries is one way to maintain a healthy score.

How Does Paying Off Loans Early Impact Credit Score?

Paying off a loan early can be a smart financial move, but its impact on your credit score can actually vary:

• Positive: Reducing debt can improve your credit utilization ratio and overall financial health.
• Neutral to Negative: Closing an account early might shorten your credit history or negatively alter your credit mix.

However, the long-term benefits of being debt-free often outweigh any temporary dips in your credit score. You should always consider the full financial picture and how it impacts achieving your goals.

Understanding Your Credit Score Is Essential

Credit scores are a vital part of your financial profile. Understanding how they are calculated (and what does and doesn’t affect them) puts you in control of your financial future.

At Hancock Whitney, we believe that financial education is the first step toward financial freedom. Whether you’re working to build, maintain, or repair your credit, our team is here to provide you with the right financial tools, banking resources, and account types.

To open an account, simply reach out to us today or apply online.

Disclosures

The information, views, opinions, and positions expressed by the author(s), presenter(s), and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.

This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.

Hancock Whitney Bank, Member FDIC and Equal Housing Lender.  All loans and accounts subject to credit approval. Terms and conditions apply.