How Credit Scores Actually Work — FICO Explained Simply

What Is a Credit Score?

A credit score is a three-digit number (300–850) that summarizes how likely you are to repay a debt. The most widely used system is the FICO score, created by the Fair Isaac Corporation. Nearly every major lender uses FICO when making credit decisions.

Your score isn't pulled from one place — it's calculated from the data in your credit report, which each of the three major bureaus (Experian, Equifax, TransUnion) maintains separately. You technically have three scores, one from each bureau. They're usually close but not identical.

The 5 Factors (And How Much Each Counts)

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1. Payment History — 35%

The single biggest factor. FICO looks at whether you've paid your bills on time across all accounts: credit cards, loans, mortgages, car payments, and even some utility and phone accounts.

One 30-day late payment can drop your score 60–110 points. A 90-day late payment is even worse.

Positive payment history builds slowly — you need at least 6 months of on-time payments before it shows meaningful impact. Set up autopay for every account. This factor is not negotiable.

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2. Credit Utilization — 30%

How much of your available credit you're using. Under 30% is good. Under 10% is optimal. Above 50% and your score starts taking significant hits.

Utilization is calculated both per-card and across all cards combined. Both numbers matter. The fastest way to raise your score is to pay down credit card balances.

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3. Credit History Length — 15%

How long you've had credit. FICO looks at: - Age of your oldest account - Age of your newest account - Average age of all your accounts

This is why you should never close old credit cards. A 10-year-old card that you barely use is contributing 10 years of history to your average. Closing it removes that history and drops your average account age.

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4. Credit Mix — 10%

FICO rewards having different types of credit: credit cards (revolving), car loans, student loans, mortgages (installment). Having only credit cards is okay. Having both credit cards AND at least one installment loan optimizes this factor.

This is why adding a credit builder loan to your mix can add 20–50 points to a thin file.

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5. New Credit Inquiries — 10%

Every time you apply for credit, the lender does a "hard inquiry." Each inquiry can drop your score 5–10 points and stays on your report for 2 years (though it stops affecting your score after 12 months).

Multiple inquiries for the same type of loan (like mortgage rate shopping) within a short window are treated as a single inquiry. But applying for multiple credit cards within a few months is additive — each one counts.

What Doesn't Affect Your Score

- Your income - Your bank account balance - Your age, race, gender, or relationship status - Checking your own credit (soft inquiry) - Whether you carry a balance from month to month (a common myth) - Public records that aren't debt-related (most of the time)

Score Ranges and What They Mean

| Score | Category | What You Can Typically Get | |-------|----------|--------------------------| | 800–850 | Exceptional | Best rates on any product | | 740–799 | Very Good | Near-best rates | | 670–739 | Good | Most cards and loans available | | 580–669 | Fair | Limited unsecured options, secured cards | | 300–579 | Poor | Secured cards, credit builder loans only |

How Long Negative Items Stay on Your Report

| Item | Duration | |------|----------| | Late payment (30-89 days) | 7 years | | Late payment (90+ days) | 7 years | | Collection account | 7 years | | Chapter 7 bankruptcy | 10 years | | Chapter 13 bankruptcy | 7 years | | Hard inquiry | 2 years (affects score for ~12 months) |

Use our free credit score simulator to see how changes to any of these factors would affect your projected score today.