How Are FICO Scores Calculated?

Major Categories

About two thirds of the FICO score is based on just two categories. The first, payment history, accounts for 35 percent of an individual's credit score. Credit history refers to the extent which you make your credit payments on time. Delinquent payments lower a credit score significantly, as do adverse judgments such as liens or bankruptcy. Late payments are grouped into 30, 60 and 90+ day categories, with the overall score dropping as payments become more delinquent. The second major category, amount owed, considers the total amount of credit debt a person has compared to their income and total available credit. A borrower who has already taken out most of their available credit will have a lower score than one with relatively little debt.

Minor Categories

The remaining one third of your FICO score comes from a variety of minor categories, including types of credit, length of credit history and new credit. A mature borrower, one who has a long history that includes several types of debt, such as credit cards, a home mortgage and car loans, receives more favorable treatment because their risks are better understood than a younger borrower. New credit refers to the amount of recently acquired credit lines or credit inquiries. Because it's not clear how new credit lines will be used, and how they will ultimately affect the borrower's credit, they lower an individual's credit score. The effect is modest, however, compared to the major categories.

Algorithms

The raw data that constitutes the major and minor categories are computed into a credit score through the use of proprietary algorithms. The three major reporting agencies each use their own algorithm, so the results are slightly different. Equifax uses the BEACON score, Experian uses the Experian/Fair Isaac Risk Model and TransUnion computes the EMPIRICA score. All three are versions of the FICO score, which is a registered trademark of the Fair Isaac Corporation. The three major reporting agencies collaborated to create single scoring method, called the VantageScore, on a scale from 501 to 990, which is seeing increased popularity.