How FICO Credit Scores are Calculated

Here is the breakdown of how a credit score is calculated, by myFico:

There are several different ways to calculate a cr

There are several different ways to calculate a credit score and a bunch of companies that do it a bit differently, and each method has various pros and cons.

Each method also has a range, with the main ones having a 300-850 range. The chart above shows the default way that the general FICO score is calculated, by the FICO company.

Generally speaking, having over 750 puts you in the very top bracket, where you’ll get access to the best credit cards and the best loan terms, and will have no problems when employers or landlords check your credit.

If you can go further, t0 800+, then you’re comfortably in the top tier and roughly at the maximum end of the range.

35% Payment History

This is the single biggest factor: how reliably you pay your bills. By never, ever missing a payment over the course of years, your credit score will start to climb.

This can actually be kind of forgiving. Even if a payment is a few days late by mistake, most companies have a grace period where they won’t report you to the credit agencies. You generally have to be quite late in order for it to officially become a late payment. It’s best not to take chances though; pay all your bills every month like clockwork.

Automate your payments if it helps you. I personally like to sit down in the third week of each month and check every one of my accounts to pay them and keep everything tidy. It takes about ten minutes.

30% Amounts Owed / Credit Utilization

Creditors like to see that you’re not using anywhere near the maximum amount of credit available to you.

If you have 2 credit cards, each with a $5k limit, and each of them is filled to $4.9k, then it looks to them like you’re being irresponsible. Just like how some people’s expenses reliably expand to equal their income, this example looks like someone who naturally tends to borrow as much money as they can. That makes them look risky.

Instead, it’s best to have very high credit limits, and then use only a small fraction of them. A rule of thumb is to use less than 10% of your total credit limit, and to not use more than 10% of any individual credit account.

You can optimize this by adjusting both variables; you can spend less, and you can open new credit accounts or ask for increases on your existing credit limits in order to minimize your credit utilization ratio each month. You can also spread your purchases across multiple cards so that you never use a large portion of any card at once.

15% Length of Credit History

If someone opened their first credit account 6 months ago and has paid 100% of their bills on time, that looks pretty good. It’s a nice start.

But it doesn’t look anywhere near as good as someone who has had several credit cards for 10+ years who has never missed a payment on any of them, and has never missed student loan, mortgage, auto loan, or utility bills.

Some of this obviously just has to come with time, but your actions can influence it as well.

Suppose in one example, you open up your first credit card account today, and open up another credit card account 5 years from now. Ten years from now, one of your accounts will be 10 years old, and the other will be 5 years old, so the average age of your credit history will be 7.5 years.

Now, suppose that you open up a card account today, and then open up a new card account every two years. At the ten year mark, you’ll have 6 credit accounts that are 0, 2, 4, 6, 8, and 10 years old.  The average age will only be 5 years.  It’s generally better to have fewer, older accounts, rather than having a clutter of many newer accounts.

Also, it’s almost never a good idea to close an old account. Those old accounts are your “anchors” that you should try to keep forever, because they dramatically increase your overall length of credit history.

10% Credit Mix

There are two main types of credit: “revolving” credit and “installment” credit. Ideally, you want at least one of each, because it shows creditors that you can handle multiple types of loans.

Credit cards are the main type of revolving credit. If you have at least one credit card, then you have some revolving credit. It’s “revolving” because there is no end-date; you can just tap into it as much or little as you want each month, and pay it off regularly.

Student loans, auto loans, and mortgages are examples of installment credit. They have a natural end-date, and they expect regular payments each month of the same amount.

I have a co-worker with a high credit score that got rejected for an auto-loan. The credit score is important, but it’s not the only factor lenders look at. In her case, her parents paid her way through college so she never had student loans, and didn’t yet have any sort of mortgage or auto loan.  All she had in her credit history was good credit card usage. The lender was not confident enough to give her a big auto loan despite the fact that she handled her credit cards well, because there just wasn’t enough information there for them to feel comfortable.

10% New Credit

If you open up a bunch of new cards or loans at once, it looks risky. Lenders will wonder if maybe you lost your job, and you need to stay afloat with credit in the meantime. Or maybe you had a big medical bill and are becoming insolvent.

Be conservative with the number of times you apply for new credit.


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What credit-building alternatives are there to adding your child as an authorized card user?

Beyond using the authorized user strategy, there are a few options for helping a child build credit. Note that all of these have a minimum age of 18.

Take out a personal loan

Personal loans often have high interest rates, but when there is a need and is used responsibly they can help borrowers establish credit. Taking out a small personal loan may help a young person enhance their credit mix in a healthy way. Only take out a loan in an amount that you know you can confidently pay back.

Take out a credit-builder loan

Secured credit-builder loans are designed for people who want to build a credit history. Repaying these loans could help credit-poor individuals establish good credit behavior and lands positive payments on the account owner’s credit report. Credit-builder loans often come with non-refundable administrative fees as well as high interest rates, so be sure to consider which options might be best for you. Missed or late payments may also negatively affect your credit score, so be sure to commit to a payment plan that aligns with your lifestyle. Make sure to confirm that the lender that provides your credit-builder loan reports to the credit bureaus, since not all of them do so.

Sign up for a secured credit card

Secured credit cards, like credit-builder loans, help consumers move their credit in a positive direction. When a person opens a secured card, they make a small deposit that serves as collateral and effectively becomes their credit limit. Before committing to a secured credit card, be sure to do research on the types of fees, annual fees and/or interest rates that may come with the card. You should also confirm that the secured credit card you’d like to use reports activity to the credit bureaus since there may be some secured cards that do not.

Make Sure Your Credit Limits Are Reported Correctly

Not only does the amount of debt you carry affect your credit score, but the ratio of your credit card debt to the limit on those credit cards is also a factor. If your credit limits aren’t reported accurately, it can look like you’ve maxed out your credit card. You can dispute inaccurate credit limits with the credit bureau or call your creditor to ask why your credit limit isn’t reported accurately.

Some people ask for credit limit increases as a way to improve their credit utilization. But be careful requesting that your limit be increased. Some credit card issuers do a hard pull where an additional inquiry is placed on your credit report and factored into your credit score. Soft pulls are better but may not be what the creditor needs to process your request for a credit limit increase.

Age of Credit Accounts: Be Patient

One of the other major contributing factors to credit scores is the duration of time your credit accounts have been open. The longer the better. This is where patience comes into play. There is very little you can do to improve your score from this angle, outside of opening up a credit account as quickly as possible, and waiting for it to mature.

How To Maximize The Age Of Your Credit Account

Become An Authorized User At An Early Age. Earlier in the guide, we mentioned that becoming an authorized user can be a great way to establish credit when you have none to begin with. Another benefit of this method is that you can establish a credit account at an early age – even as young as 16. This will give you a jump start on your “credit age.” Provided that the account is not closed before you reach adulthood, it will benefit your credit score greatly by opening up your own lines of credit once you’re old enough.

Do not close credit accounts unless it’s absolutely necessary. Keeping credit accounts open is key to maximizing your credit score. Closing down an account, even voluntarily, can have a strong, negative impact on your FICO score. The older the age of the account, the larger the hit to your score. This is why you should avoid having to have your first credit account be one on which you do not pay an annual or monthly fee. Opting for a “free” account means there will be little to no harm in keeping it open indefinitely, and your FICO score won’t be at risk.

13. Pay Off Credit Card Balances Every Month

In addition to lowering existing debt balances, minimize ongoing debt by making it a goal to pay off your credit cards each month. Zeroing out your balance each statement period keeps your credit utilization low, which is one of the best ways to strengthen credit. You’ll also avoid incurring interest charges.

How Long Does Improving Your Credit Score Take?

There is no set minimum, maximum, or average number of points by which your credit score improves every month, and there is no set number of points that each action will gain. How long it takes to improve your credit depends on the specifics for why your credit score is low. If the major negatives on your credit score are credit utilization, and then you pay off your balances, your score can improve drastically in a single month. If your credit is low because of multiple collections and poor payment history, then it will take several months of on-time payments to see any positive movement in your score.

Does Paying Off a Loan Help or Hurt Credit?

Paying off a loan frequently hurts credit because it impacts your credit history and your credit mix. If the loan that you have paid off is your oldest credit line, then the average age of your credit will become newer and your score will drop. If the loan that you pay off is your only loan, then your credit mix suffers.

Dont Let Your Accounts Wind Up in Collections

A debt-collection account is one of the most serious types of delinquencies you can have. Since any account—even a small library fine or your kid’s cafeteria fees—has the potential to wind up on your credit report, it’s important that you pay all of your debts or at least make payment arrangements with the biller.

17. Create a Budget

To help pay off debt and keep your spending in check long term—especially if the chaos of the past few years affected your finances—take time in 2022 to make a budget. This process will offer clarity on the amount you’re earning and how much you can safely spend on discretionary items. You’ll then be more likely to make smart choices when you’re tempted to use a credit card, and you can prioritize limiting your credit utilization.

Considerations for Getting a Credit Builder Loan

There is one potential pitfall if you’re considering getting a credit builder loan. 

If the loan that you get has too short of a term, it could hurt your length of credit history. For example, only getting a 12-month credit builder account could hurt your credit score by lowering your average credit account length. 

Most credit builder loans have terms of just 12 to 24 months.

A Credit Strong credit builder loan gives you the option to obtain an account that can build up to 120 months of payment history, 10 times the length of credit history of a ‘typical’ credit builder loan. The long repayment period gives you a great tool to improve your length of credit history. 

No other credit builder loan on the market offers this long of a repayment term timeline.

Best of all, Credit Strong accounts have no prepayment penalty or early withdrawal fees, so you can cancel the account at any time for free if your personal financial circumstances change unexpectedly. The lowest plan starts at just $15 per month, so it’s affordable for anyone who wants to build their credit.

4 Tips to Increase Your Credit Score t0 800+

By the time I was a senior in college, my credit score was already effectively in the top range, at 800+, and I’ve kept it there ever since.

FICO Score:



These are the steps I took: 

These are the steps I took: 

  1. Became an authorized user on my father’s card when I was a teenager.
  2. Acquired my own low-limit card when I was 18, and never missed any payments.
  3. Never carried any credit card debt between months, and never had a high credit utilization ratio.
  4. Took out student loans, and paid them back consistently on time.
  5. Opened a couple premium credit card accounts, with great rewards.
  6. Never closed any credit card accounts, because they increase my average credit account age.
  7. Avoided opening too many new accounts, because they would reduce my average credit account age.
  8. Increased my credit card limits as appropriate.  My credit utilization ratio is less than 2%.
  9. Monitor my score over time to see areas of improvement.
  10. Check my credit reports regularly and ensure there are no errors.

Naturally, if you’re reading this, you’re at a different starting point than me, and have your own unique circumstances.

A lot of the things here just take time; having a strong payment history and increasing the average age of your accounts can take a few years. You need to spend less money than you make, so that you can pay down any high-interest debts you might have, and build some cash reserves so that you always have plenty of cash to pay all your bills going forward.

But, besides doing those long-term necessities, here are the 4 biggest impact things you can do this month to start improving your FICO and VantageScore fast:

1) Check Your Credit Reports

The three credit reporting agencies, active in many countries, are Experian, Equifax, and TransUnion. They’re the companies that keep detailed records of your credit and make it available to people that request it.

Thanks to the Fair and Accurate Credit Transactions Act, all three companies are required to provide U.S. residents with a copy of their credit report if requested, once per 12 months.

They do so through the website; that’s the only source for free credit reports authorized by this Act.  They don’t show you the scores for free, but they show you their records of your payment history, so you can check to make sure there are no mistakes. The website lets you check your detailed report one time from each of the three credit rating agencies per year.

If you’re planning on making a big purchase, or if you are fixing severely bad credit or found some mistakes in one report, then you might want to check all three at once. On the other hand, if you’re more in “maintenance mode” and just want to check your credit regularly for errors, then the optimal strategy is to check your report from one of the agencies every 4 months.  That way, you can spread your three free reports out evenly over the year for the most up-to-date info.

You can also pay a fee to receive more information on that site, like the actual score, but there are better free ways to do that:

  • Discover Financial lets you check your FICO score for free, here.
  • Credit Sesame lets you check your VantageScore for free, here.

The great thing about them is they analyze your credit usage to show you specific things you can do to increase your score.

It’s hard to fix your credit if there are negative mistakes in your credit report holding you back. Make sure they’re accurate!

2) Optimize Your Credit Utilization Ratio

If you already have one or more credit cards, this could be the biggest move to make if you want to get to 800+. It’s the second most important factor that affects your credit score, since it accounts for about 30% of your score.  You can change it quickly, and it has a major impact if you get it right.

Ideally, you want a credit utilization ratio of below 10%.

First, if you carry a credit card balance from month to month, pay that off asap. The interest rates are horrendous and it’s negatively impacting your credit utilization ratio.

Second, if you have two cards that each have, say, a $7,500 credit limit, and you have $6,000 in debt on one card (80% utilization) and only $1,000 in debt on the other card (13% utilization), then try to balance them out. Pay down the higher debt one first, so that none of your individual cards have a very high credit utilization ratio.

Third, even if you do pay off your credit card balance each month, your payment timing might be unfairly hurting you. Credit card issuers usually report your credit information to the credit rating agencies once per month, around the end of your billing cycle.  But what if you just paid for a major $3,500 car repair on your $5,000 limit card right before they report your credit utilization?  They’ll say you have a 70% credit utilization ratio, which is bad, even though you always pay your card off every month.

There are two main ways to fix that:

  1. Pay your cards off 2-3 times per month instead of once per month to keep your balance low at any one time. If you make a major purchase, pay the card off right away to get your credit utilization ratio back down.
  2. If your credit score is already decent and you’re looking to make it exceptional, then ask your card issuers to increase your credit limits on your cards. For any given level of spending, a higher credit limit will mean that you have a lower credit utilization ratio.  Alternatively, you can open one more credit card account (don’t go overboard), so that you can split purchases more evenly and keep a low credit utilization ratio.

3) Get a Secured Credit Card

If your credit score is very low or nonexistent, and you don’t have any credit cards, then consider getting a secured credit card.

A secured credit card is a low-limit card that a bank can issue to you, that requires you to pay them a security deposit up front. That way, their risk is low and they can afford to give a small credit line to people with low or no credit.  Many of the major issuers, like Discover and Capital one, have good offers on secured cards.

Typically, the credit limits are tiny, like $200 or less.  Pretty much the only reason secured credit cards exist is to help people build credit. Start making some purchases with the card, and pay it back in full every month. Over time, you’ll start building a positive credit history.   Make sure your other payment types (utility bills, student loans, mortgage, auto loans, etc) are paid on time as well.

Eventually, when your credit score is higher (and you have good credit card habits), ask your issuing bank to convert your account to a normal, unsecured card. This way, you can get a higher limit, get better rewards, and get your security deposit back.

Whatever you do, don’t close your secured card, unless for some reason you absolutely can’t handle having credit.  You want to start building a long-lasting credit account, because average credit age is a big factor for your credit score. So, once your score is up, convert it to a better card.

4) Diversify Your Credit Mix

The diversity of your credit mix accounts for about 10% of your credit score. It shows the credit rating agencies that you can responsibly manage several types of debt.

Don’t take out debt you don’t need, because it results in unnecessary interest payments. However, you can be strategic with your debt.

For example, if you have credit card debt and your credit score is decent, then taking out a peer-to-peer loan, like with Lending Club, can help you pay off your higher interest rate credit card debt and diversify your credit mix at the same time.

Or, let’s say you just have student loans, and you need to get a car. Taking out a small auto loan to finance part of it, and paying down some of your student loans quicker with the cash you save up front, means your credit is more diverse.

The bottom line

As it is with many of life’s problems, there’s no better time to address the issue than now. By making on-time payments and carefully assessing your financial needs, you will be on the right track toward building strong credit.

Keep in mind that the path to financial recovery takes time, sometimes even years. But regardless of the dilemma you may find yourself in, a proactive approach is the best way to tackle financial recovery. And your credit score will thank you in the long run.


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