What Are the Five Parts of a Credit Score Formula?

A credit score serves as a numerical representation of an individual’s creditworthiness, indicating the likelihood of repaying borrowed funds on time. These three-digit numbers, typically ranging from 300 to 850, are widely used by lenders to assess the potential risk associated with extending credit, such as mortgages, credit cards, or auto loans. A higher score generally leads to more favorable loan terms and interest rates, while a lower score can result in higher costs or even denial of credit. Credit scores are not static; they are dynamically calculated based on information within credit reports, reflecting a complex formula that evaluates various aspects of financial behavior.

Payment History

Payment history is typically the most significant factor in credit scoring models, often accounting for approximately 35% of a FICO Score. This component details an individual’s track record of making payments on various accounts, including credit cards, retail accounts, and installment loans such as car loans or mortgages. Consistent on-time payments demonstrate financial reliability, which is highly valued by lenders.

Conversely, late payments can substantially harm a credit score. Even a single payment reported 30 days past its due date can lead to a notable score reduction, with the negative impact escalating as payments become more delinquent (e.g., 60 or 90 days late). Public record items like bankruptcies, foreclosures, or accounts sent to collections also appear in this section and carry significant consequences for a credit score. While negative marks remain on a credit report for several years, their impact generally diminishes over time, and consistent on-time payments following a negative event can help rebuild a score.

Amounts Owed

The “Amounts Owed” component, also known as credit utilization, is another substantial factor in credit scoring, typically making up about 30% of a FICO Score. This factor assesses the total amount of debt an individual carries across all revolving credit accounts, such as credit cards, relative to their total available credit. The credit utilization ratio is calculated by dividing the total outstanding balances by the total credit limits and is expressed as a percentage.

A lower credit utilization ratio generally indicates responsible credit management and can lead to a higher credit score. Financial experts commonly advise keeping this ratio below 30% to maintain a healthy credit profile, though a lower percentage, such as 10% or less, is often considered ideal for achieving excellent scores. High balances that push utilization rates above these thresholds can signal increased risk to lenders, potentially impacting a score negatively.

Length of Credit History

The “Length of Credit History” component contributes to approximately 15% of a FICO Score. This factor considers several elements, including the age of an individual’s oldest credit account, the age of their newest account, and the average age of all their active accounts. A longer credit history generally benefits a credit score because it provides a more extensive record of an individual’s financial behavior, allowing lenders to assess consistency and reliability over time.

Maintaining older accounts in good standing can be advantageous for this factor, even if they are not frequently used. Conversely, closing an old credit account, particularly one with a long history, could reduce the average age of accounts and negatively impact this component. While a long history is generally favorable, individuals new to credit can still achieve good scores by demonstrating responsible management in other areas, such as payment history and amounts owed.

New Credit

The “New Credit” factor typically accounts for around 10% of a FICO Score. This component evaluates the number of recently opened credit accounts and recent credit inquiries. When an individual applies for new credit, such as a loan or a credit card, a “hard inquiry” is often placed on their credit report. Each hard inquiry can cause a small, temporary dip in the credit score, though its impact usually fades within a few months.

“Soft inquiries,” which occur when an individual checks their own credit or when a lender pre-screens them for an offer, do not affect a credit score. Opening multiple new credit accounts within a short timeframe can be viewed by scoring models as an increased risk, signaling financial distress or an over-reliance on credit. This is because a sudden increase in new credit can also lower the average age of accounts, further impacting the length of credit history. Therefore, it is generally advisable to apply for new credit only when necessary.

Credit Mix

The “Credit Mix” component makes up approximately 10% of a FICO Score. This factor assesses the variety of credit accounts an individual has successfully managed, showcasing their ability to handle different types of financial obligations responsibly. A diverse credit portfolio typically includes a combination of revolving credit, such as credit cards or lines of credit, and installment loans, like mortgages, auto loans, or student loans.

Demonstrating proficiency in managing both revolving and installment credit types can positively influence a credit score, as it suggests a broader financial management capability. However, this factor generally holds less weight compared to payment history and amounts owed. It is not recommended to open new credit accounts solely for the purpose of diversifying a credit mix, as unnecessary applications can lead to hard inquiries and increase overall debt, which may negatively impact other, more heavily weighted, scoring factors. Instead, a healthy credit mix often develops naturally as individuals acquire different types of credit products over their financial lives.