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.
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:
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.
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.
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.
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.
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.
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:
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:
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.
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:
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.
Credit inquiries occur when someone checks your credit report. There are two types:
Limiting hard inquiries is one way to maintain a healthy score.
Paying off a loan early can be a smart financial move, but its impact on your credit score can actually vary:
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.
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.