The Anatomy of a Credit Score – Understanding the Complicated Credit Scoring System

By Aaron Sarentino Reviewed by Minh Tong Updated Jun 07, 2022
The Anatomy of a Credit Score – Understanding the Complicated Credit Scoring System

Americans are often advised that their credit score is vital to their financial well-being. It’s common to hear people boast of high credit scores or desperately ask for help when their scores dip. 

However, a wide knowledge gap about credit scores exists among consumers and across the entire spectrum of credit score users. 

Credit scores are so misunderstood and generally regarded as a de facto measurement of borrowing strength. Also, many consumers misguidedly assume that credit scores include income, assets, or net worth in their calculations. 

We have prepared this guide to help clear up the muddle and help everyone become smarter about credit scores.

So, What’s a Credit Score, Anyway?

A credit score is a three-digit number that acts as a numeric interpretation of a consumer’s risk level. 

The intended purpose of those three powerful little numbers is actually to minimize the risk incurred by lenders. Every time you apply for credit, such as a home mortgage or a new credit card, your lender will use your credit score to determine whether or not to approve you for that credit.

Two companies, FICO score and VantageScore, dominate credit scoring. They pull from the same data and both use a credit score range of 300-850. 

If you have an excellent FICO Score, your VantageScore is likely to be high as well.

Your credit score can vary from month to month even though you have the same number of loans, pay the same bills, and stay on top of your credit cards. See our article on loan breakdown.

How Is My Credit Score Determined?

While other credit-scoring systems exist, the credit score you order in most cases will be your FICO score. 

Every credit bureau may include different info in their calculations, so your FICO score can vary depending on the specific credit bureau. 

The only way to be in control of your own creditworthiness is to understand how that risk is calculated.

The list of factors used in calculating credit scores is somewhat lengthy but fairly straightforward. FICO uses 5 key factors while VantageScore uses 6.

While the exact formula used to determine your FICO score is protected, FICO divulges some basic categories that affect your score:

Payment history (35 percent) – Your payment history tells lenders how well you pay back any debt. Late payments on bills such as auto loans, credit cards or mortgages will cause your score to drop, while on-time payments will improve it. Does making minimum payment affect credit?

Credit balances and utilization (30 percent) – This category is a little trickier and often the most misunderstood credit score component. If you owe a big percentage of your available credit on a credit card, lenders may view you as a potential risk of late payment or nonpayment. A history of small balances and never missing payments will improve your credit score. 

Much less weight goes to the next 3 categories, but they’re still worth watching:

Length of your credit history (15 percent) – The length of time your accounts have been open matters. The cardinal rule is to never close your old accounts, no matter how little you use them or how bad the terms might be. If you close your oldest account, your next oldest account becomes the reigning benchmark. Credit reporting agencies only consider the average age of any remaining accounts. The duration since account activity also weighs into this equation.

New credit applications and approvals (10 percent) – This credit score component looks at how many new credit accounts you’ve opened in a short period. Hard credit inquiries can hurt your score, especially if several happen within a short time frame. These inquiries occur when you apply for a credit card or loan.

Existing mix of credit accounts (10 percent) – Also coming in at 10 percent, this part of your score looks at your mix of revolving, installment, consumer finance and mortgages. Handling different types of credit will help you improve your score. Lenders like to see that you can reliably handle various financial obligations.

Which Part of My Credit Score is Most Important?

Percentages are attached to each category can help you determine which areas are most important to your score.

Your payment history, which takes the lion’s share of your score, is probably the most complex factor of the credit score formula since it contains several variables, such as:

  • On-time payments
  • Delinquencies and collection items
  • The severity of delinquency (how long past due the debt is)
  • Public records (foreclosures, suits, bankruptcies, liens, judgments, wage attachments, etc.)
  • Amount past due on delinquent accounts or collection items
What’s A Good Credit Score

Credit scores of 670 or above are considered good.

Having a good credit score can help you do everything – speeding up credit approvals, lowering your interest rates, reducing deposits required by utilities, getting approved for an apartment, lowering your insurance premiums, getting better credit card, auto loan and mortgage offers, etc. Learn how to clear your credit score.

Borrowers with excellent scores (above 800) often have many options, including the ability to qualify for 0 percent financing on cars and for credit cards with 0 percent introductory interest rates.

  • Poor: 300 – 579
  • Fair: 580 – 669
  • Good: 670 – 739
  • Very Good: 740 – 799
  • Excellent: 800 – 850
What About Credit Reports?

While credit scores may be the most talked-about item, your credit report is more than just a numerical rating. A credit report is like the financial equivalent of a report card – it shows lenders your past credit performance. 

Whether you’re trying to build your credit or just being wary about avoiding identity theft, it’s good to check your credit report at least once a year. 

Upon request, each of the three nationwide credit reporting agencies (Equifax, TransUnion, and Experian) will provide you with a free credit report once a year. 

The problem when you receive that credit report is that it’s not always easy to know what to look for or what to do if you think the report contains incorrect information. 

Your credit report contains:

  • Identifying information, including your name, date of birth, employment history, Social Security number, and current and previous addresses. If personal information in your credit report is inaccurate, you could be held responsible for debts that aren’t yours.
  • Account summary/credit history, listing all accounts, the dates they were opened, balances, credit limits, payment terms and history.
  • Credit report inquiries section, which is the record of businesses who have requested to review your credit report.
  • All public records and collections, including delinquent child support, bankruptcies, liens, judgments and collection items.
  • As many as 5 “score reasons.” They’re listed in order of importance and specify the top reasons for your current score and the top factors that can be addressed to improve it.

If you notice an error on your credit report, contact the consumer credit bureau that provided the report and state your case. You don’t want to be denied a loan due to an error that one of your creditors made.

How to Improve Your Credit Score

If your score is not where you want it to be, you can improve it by:

  • Staying current on your bills
  • Keeping credit card balances below 30 percent of their limits. Read our article on what is a maxed-out credit card.
  • Increasing your credit limit
  • Spacing out credit applications
  • Having a mix of revolving, installment, and mortgage loans
  • Keeping older credit cards open to protect the average age of your accounts
  • Checking your credit report for errors and reporting them
  • Ensuring your creditors know your new address if you relocate

Read our post on denial of credit and what is the Fair Credit Reporting Act (FCRA)

Contact us today if you need relief from your credit card debt and a credit relief program. We will go over your options and provide you with the relief you deserve today.

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Aaron Sarentino

Aaron oversees executive, administrative and management functions for the firm. Aaron has a Bachelors in Business Administration from Pepperdine University. He is responsible for helping customers at every stage of the debt settlement process and focused on building loyalty to ensure long-term client retention by addressing customer issues. Aaron plays a pivotal role in the upliftment of the Americor team to ensure the best possible customer experience for clients.