The Formula for Credit Scores

Your credit score is of utmost importance when buying a home or car and even applying for other types of loans. Lenders want to know the risk they are taking by lending you money. The higher your score, the more likely you are to be approved or get a better interest rate. But who determines what your score is, and how?

Three different major credit reporting agencies, Equifax, Experian and TransUnion, maintain a record of your credit history known as your credit file. Your Credit Score is based on the information in your credit file at the time it is requested. Your credit file information can vary from agency to agency because some lenders report your credit history to only one or two of the agencies. So your credit score can vary if the information they have on file for you is different. And since the information in your file can change over time, your Credit Score may be different from day-to-day.

Fair Isaac is the company that invented the FICO® score, which is widely recognized as the industry standard for lenders. Fair Isaac doesn’t reveal the exact recipe, but you can see the basic formula. 

The Formula

There are many, many different scoring models out there. And pretty much all credit scores look at the same basic factors -- your debt, your payment history, whether you have had credit problems in the past, how long you've had credit and whether you are shopping around too much for credit. Once you know the basic factors they are looking for, you can take steps to improve your score. 

Fair Isaac uses percentages to signify how important each of the following categories is in determining how your score is calculated.

  • Payment history – 35%
  • Amounts owed – 30%
  • Length of credit history – 15%
  • Types of credit In use – 10%
  • New credit – 10%

Payment history. This category is weighted most heavily, because the first thing a lender wants to know is whether you’ve paid past credit accounts on time. The best thing you can do in this category is pay your bills in a timely manner. You can set up automatic payments with the biller or create due date reminders in Pinnacle’s online BillPay.

Amounts owed. Having credit accounts and owing money on them doesn’t necessarily mean you are a high-risk borrower with a low score. You can help yourself in this area by keeping balances low on credit cards and other “revolving credit.” Pay off debt rather than moving it around—owing the same amount but having fewer open accounts may lower your score. Closing unused cards or opening unnecessary ones solely as a strategy to improve your score could end up backfiring.

Length of credit history. In general, a longer credit history will increase your score. But even people who haven’t been using credit long may have a high FICO score, depending on what the rest of the credit report looks like. Rapid account buildup can look risky if you are a new credit user, so don’t open a lot of new accounts too quickly.

Types of credit in use. The score considers your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. In general, having credit cards and installment loans—and paying them on time—will build your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed them responsibly.

New credit. Opening one new card shouldn’t affect your score much. However, research shows that opening several credit accounts in a short period of time represents a greater risk, especially for people who don’t have a long credit history. If you have had credit problems in the past, opening new accounts and managing them responsibly will help you reestablish your credit history and raise your score in the long term.

What is changing?

FICO has recently announced changes to how it will calculate credit scores beginning this fall. Going forward, its model will stop including information about any bill that has been paid off or settled with a collection agency. Scoring calculations will also give less weight to unpaid medical bills that are with a collection agency. The changes will increase the credit scores of many, some substantially. The latest version of the FICO score is also intended to be more consistent across Experian, TransUnion and Equifax.

If you’re curious what your credit score is, you can order a copy of your FICO score from Remember that you can also request a free copy of your credit report from each of the three credit bureaus every year at Lastly, you can learn about Pinnacle’s personal credit cards here.

Jamie Sweeney can be reached at (615) 849-3382 or

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