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What Is a Credit Score and How Is It Calculated?

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Your credit score can impact your ability to get a loan, open a credit card account, rent a home or even sign up for a mobile phone plan. It can also play a large role in determining what interest rate you’ll receive on loans and credit cards.

Credit scores are calculated using these five key factors from data gathered in your credit reports:

  1. Payment history
  2. Amounts owed
  3. Length of credit history
  4. New credit
  5. Credit mix

We’ll review each of those five factors and exactly how they impact your credit score in depth below.

What is a credit score?

A credit score is a three-digit number, typically ranging from 300 to 850, that’s used by lenders to help determine a consumer’s creditworthiness. A high credit score generally indicates you’ve demonstrated responsible credit usage in the past and shows potential lenders that you’re likely to pay your bills on time.

There sometimes may be a misconception that you only have one credit score. But in reality, there are many different credit scores, and lenders may use different scores for different purposes.

For example, FICO, the primary credit-scoring company in the U.S., creates base FICO credit scores and industry-specific credit scores for auto lenders and credit card issuers. It also updates its credit-scoring models over time, and your score may vary depending on which model a creditor uses.

While the credit ratings of poor to exceptional vary depending on the credit-scoring model, FICO uses the following ranges:

  • Poor credit: 300-579
  • Fair credit: 580-669
  • Good credit: 670-739
  • Very good: 740-799
  • Exceptional: 800-850

Credit card issuers, lenders and other creditors may also use a VantageScore credit score (a competitor of the FICO Score), which utilizes the following ranges:

  • Very poor: 300-499
  • Poor credit: 500-600
  • Fair credit: 601-660
  • Good credit: 661-780
  • Excellent: 781-850

The credit bureaus themselves also create their own credit scores based on their credit reports. Additionally, lenders may use proprietary credit-scoring models instead of (or in addition to) FICO, VantageScore or bureau credit scores.

How is a credit score calculated?

Although credit-scoring algorithms are industry secrets, credit-scoring companies do reveal the basics of what factors impact a score and how a credit score is calculated — and it all starts with your credit reports.

There are generally three places to find your consumer credit report: Experian, Equifax and TransUnion. These are the three main credit bureaus that collect consumer credit information in the U.S. Each credit report contains information, such as your history of payments on credit accounts, whether you have an account in collections and other personal identifying data and public records, such as bankruptcies.

Credit scores turn the information in your credit report into an easy-to-use number. Think of them like your grade point average in school — all your exams (i.e. credit activity) are included on your credit report, and the credit score is your final GPA.

Your credit reports aren’t necessarily identical, and your credit score may vary depending on which credit report the score is based on. Additionally, there are many different credit-scoring models and each may calculate your score in a different way.

How each of the 5 factors affect your credit score

Here’s how each of the five factors that comprise your credit score come into play:

Payment history (35%)

Your payment history is the most important factor impacting your credit score — making up 35% of the total score. This includes whether you’ve made past credit card or loan payments on time, as well as the specifics around any late payments, such as the length of time the payment has been past due and the number of times you’ve been late.

Just know, a derogatory mark’s impact can diminish over time.

For example, a late payment will stay on your credit report for up to seven years, but its negative impact will lessen over time as you add more positive payment history to your credit reports.

So even if you’ve had trouble staying on top of your bills in the past, your score can recover with good behavior on new or existing accounts.

Amounts owed (30%)

Right behind payment history, the amount of revolving debt (on credit accounts, such as credit cards or other lines of credit, but not installment loans) you carry accounts for 30% of your credit score.

This includes the amount of money you currently owe across individual accounts as well as all your revolving accounts together; this mathematical calculation is often referred to as your credit utilization ratio.

To clarify further, your credit utilization ratio is the amount of credit you use compared to your total credit limit per credit account as well as across all your credit accounts (again, installment loans, such as for a car or mortgage, do not factor into your credit utilization ratio).

To calculate your credit utilization ratio for an individual card, divide your current credit card balance by the card’s credit limit. For example, if you are carrying a $500 balance on a credit card with a $1,500 credit limit, your credit utilization is 33%.

To determine your overall credit utilization ratio, add all your balances together and divide that amount by all your credit limits added together.

For example, if you have three credit cards with a combined credit limit of $10,000 and your reported balance on all three cards adds up to $5,000, you’re utilizing 50% of your available credit.

If either your individual or total credit utilization is too high, your credit score will suffer as lenders may determine that you are high risk and may have trouble managing your debts. For this reason, financial experts recommend keeping your credit utilization ratio below 30%.

Tip: Your utilization rate is one of the few credit-scoring factors you have the power to change quickly, leading to a credit score boost. If you can pay down your credit cards or other revolving accounts, you may be able to see a rise in your score within 30 days.

Credit card issuers tend to report balances around the end of your statement period but before your bill’s due date. As a result, you may have a high utilization rate even if you pay your bill in full each month and never pay interest.

A helpful credit hack is to make credit card payments before the end of the statement period. Doing so can lower the balance that’s reported to the credit bureaus, which will lower your utilization rate and can help your credit score.

Length of credit history (15%)

The length of your credit history makes up 15% of your credit score, and takes three main factors into account:

  • How long your credit accounts have been open, including the age of your oldest account, the age of your newest account and an average age of all your accounts.
  • How long specific credit accounts have been established.
  • How long it has been since you used certain accounts.

Generally, a longer credit history will be better for your credit score. To calculate your credit history, add the number of years you’ve had each of your credit card accounts and divide that amount by the number of credit cards you have. For example, if the current year is 2020, and you opened credit cards in 2005, 2010 and 2018, the average length of time you’ve had credit is nine years. Each time you open a new account, your average length of credit history drops.

The role that closed accounts play in your credit history can sometimes be confusing. When you close an account, finish paying off a loan or pay a delinquent account (such as a collections account), the account won’t immediately fall off your credit reports.

Instead, the credit bureaus remove closed accounts that never had late payments 10 years after the account closes. If there was a late payment, the account gets removed seven years after the initial late payment, even if the account has since been sold to one or several collection agencies.

Closed accounts continue to affect your length of credit history, and may impact other factors, as long as they appear on your report.

New credit (10%)

Applying for new credit accounts and the length of time since you opened a new account impacts 10% of your credit score.

Each time you apply for new credit and a lender checks your credit history, a hard inquiry appears on your credit report. This lowers your score by a few points every time it occurs and stays on your credit report for two years (although the negative impact lessens over time).

Multiple hard inquiries in a short period of time may signal to lenders that you are a high-risk consumer and can cause your application to be denied. However, if you are rate-shopping for a mortgage, auto loan or student loan within a 45-day window, those inquiries will be grouped into one hard inquiry when you apply for the loan.

We should note that soft inquiries, which occur when you check your credit score or when a creditor preapproves or prequalifies you for an offer, don’t have any impact on your credit score.

Credit mix (10%)

Your credit mix is the variety of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans you have.

While you aren’t required to have each of these types of loans, maintaining a diverse range of credit accounts helps demonstrate to lenders you are capable of managing a variety of financial obligations.

Additionally, your experience with a particular type of account may be a greater factor for industry-specific models. For example, your history of payments on an auto loan may be more important to your auto-industry score than to a basic scoring model.

What doesn’t affect your credit score?

The following personal and financial information do not impact your FICO or VantageScore credit scores (even if it appears in your credit reports):

  • Age, sex, gender, race, nationality, ethnicity or where you live.
  • Religious or political affiliations.
  • Marital status.
  • Income, assets, employment status or job title.
  • The interest rates on your accounts.
  • Whether you receive public assistance or enroll in credit counseling.
  • Anything that isn’t in your credit report.

How to maintain a solid credit score

Although the credit-scoring models vary, they’re often similar enough that your scores will rise or fall in tandem. Knowing what factors impact your credit can help you improve your scores and increase your chances of being approved for credit cards and loans with lower interest rates.

To help keep your credit scores on the up-and-up, be sure to pay your bills on time and in full (whenever possible) each month, maintain low balances, avoid closing credit card accounts whenever possible, minimize the amount of new accounts you open and sustain a good variety of credit accounts.

You should also check your credit score often to identify potential fraud, identity theft or legitimate errors, which can all bring down your credit score. You can check your credit score for free (without hurting your credit) at LendingTree.


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