How Credit Works

Your credit scores can affect many aspects of your financial life, for the better or the worse. So, it pays to understand the factors that influence your credit scores and what you can do to build strong credit for the future.

To begin, you should know that you don’t have just one credit score, you have many. Different credit score developers, like FICO and VantageScore, create credit scoring models and lenders use multiple types of credit scores to assess the risk of potential borrowers. As a result, there are hundreds of credit scores commercially available—meaning you technically could have hundreds of credit scores as well.^[1]

The following guide explains the main factors that make up a FICO and VantageScore credit score. You’ll also learn why lenders use so many different credit score versions, including industry-specific credit scores that could come into play when you apply for financing like an auto loan or credit card. Finally, discover important tips on how to keep track of your credit scores and establish good credit that could benefit you for years to come.

Table of Contents

• Which factors influence your FICO® Score?
• How are VantageScores calculated?
• Why lenders use different credit score versions
• Industry-specific credit scores
• Auto credit scores
• Bankcard credit scores
• Credit scores lenders use for mortgage decisions
• Keeping track of your many credit scores

Which factors influence your FICO® Score?

When people refer to credit scores, they’re often talking about your FICO Score. The FICO Score was invented in 1989 and became available at all three major credit bureaus by 1991. Today, U.S. lenders use FICO Scores in 90% of lending decisions.^{[2] [3]}

Because lenders use FICO Scores on such a frequent basis, it’s wise to know what factors affect them. FICO doesn’t share the exact details of its credit scoring algorithms. That information is proprietary—like the company’s secret sauce. However, FICO gives consumers a basic outline so they know what actions might impact their credit scores or cause damage.

Your FICO Score calculation is based on information that appears on your credit report from either Equifax, TransUnion, or Experian (whichever credit report a lender accesses when reviewing your loan application). A FICO scoring model reviews the information on credit reports using five different credit score categories—each with a varying degree of point value.

Here are the five FICO Score categories and the influence each has on your credit score.

Payment history (35%)

How you’ve paid your credit obligations in the past has the biggest impact on your FICO Score. In fact, over one-third of your FICO Score (35% to be exact) is based on the payment history that appears on your credit report.^[4]

A few of the details that FICO considers within this credit scoring category include:

• The payment details on any credit cards, installment loans, mortgages, or other accounts that appear on your credit report.
• The presence of late payments on your credit report and how overdue any delinquent accounts may be (e.g., 30 days past due, 60 days past due, 90 days past due, etc.).
• The account balance on past due accounts or collection accounts.
• The number of past due accounts on your credit report.
• Are there any public records of bankruptcy on your credit report?
• How recently did the derogatory information (e.g., late payments, bankruptcy public records, or collection accounts) appear on your credit report?
• How many accounts are reporting “paid as agreed” on your credit report?^[4]

The more negative information you have on your credit report in the payment history category, the fewer points you’ll earn toward your overall FICO Score. But keep in mind that even if you have no late payments on your credit report, that won’t automatically earn you a perfect FICO Score since there are other factors that impact you as well.

Amounts owed (30%)

The amount of debt you carry, as your credit report reflects, is worth 30% of your FICO Score. Yet within this category, it’s your credit utilization ratio that stands out as the most important detail.^[5]

Credit utilization describes the relationship between the balances on your revolving accounts (like credit cards) and your credit limits on those same accounts. If you use a high percentage of your credit limits, your credit utilization ratio rises and your FICO Score tends to fall as a result. But when you keep your balances low on credit cards and other revolving accounts, your credit utilization ratio should remain low as well. This habit can be good for your FICO Score.

In addition to your credit utilization ratio, other factors that may affect your FICO Score within the Amounts Owed category are as follows.

• The amount of debt you owe on all accounts on your credit report.
• The amount of debt you owe on different types of accounts (e.g., credit cards, installment loans, etc.).
• The number of accounts on your credit report with outstanding balances.
• How much installment debt you owe compared to the original loan amount.^[5]

Having a large number of accounts with balances could be somewhat negative for your FICO Score. Yet, in general, the most actionable way to see a credit score lift within this scoring category is to pay down credit card balances and try to reduce (or better yet, pay off) outstanding credit card debt.

Length of credit history (15%)

FICO Scores also consider your length of credit history, and this category of information is worth 15% of your credit score. As a general rule, a longer credit history will have a positive impact on your FICO Score.^[6]

The main details that FICO scoring models consider when calculating your score within this category are as follows.

• How long have the accounts on your credit report been open?
• What are the ages of your oldest and newest credit accounts?
• What is the average age of all of your credit accounts combined?
• How long have the specific accounts on your credit report been open?^[6]

In general, you have to be patient if you hope to see credit score growth within this category. After all, it takes time for the accounts on your credit report to become older. But there is a potential strategy that could help you here—becoming an authorized user on a family member or friend’s credit card.

If someone you know adds you as an authorized user to a credit card that’s been open for some time, the action might improve your length of credit history. Yet if the primary cardholder has a short credit history, a high credit utilization ratio, or a history of late payments, becoming an authorized user could also hurt your credit score rather than helping it.

New credit (10%)

The new credit category makes up 10% of your FICO Score. And even though the category only accounts for a small percentage of your score, it’s still worth paying attention to if you want to earn and maintain a good credit score.^[7]

The two primary factors that impact your FICO Score within the new credit category are as follows.

• The length of time since you opened a new account.
• How many recent hard credit inquiries appear on your credit report.^[7]

A credit inquiry is a term that describes someone checking your credit report. You can check your own credit and the access is called a soft credit inquiry. This action doesn’t hurt your credit score. But if a lender or credit card company checks your credit report because you apply for financing, a hard inquiry occurs. Hard inquiries have the potential to trigger credit score damage—usually only to a minor degree.

Hard inquiries can stay on your credit report for up to two years. But they only factor into your FICO Score for up to 12 months. Also, hard inquiries don’t take a certain number of points off your credit score. (That’s not how credit scoring works.) Yet FICO does state that most people see a loss of less than five points when an additional hard inquiry shows up on their credit report.^[8]

Credit mix (10%)

The types of credit accounts that show up on your credit report influence 10% of your FICO Score. Ideally, it’s best to have a mix of credit cards, installment loans, mortgage loans, retail accounts, and finance company accounts on your credit report. But just because you’re missing a certain account type doesn’t necessarily mean you should go out and apply for new credit right away either.^[9]

As mentioned, applying for new credit will typically trigger a hard inquiry of your credit report. And if you qualify for a new account, your score may get hit again for the new account plus the reduced length of credit history. In this scenario, achieving a better mix of credit might not be worth the potential credit score downsides opening a new account could cause you in other credit score categories.

How is VantageScore calculated?

Although many lenders use FICO Scores, there’s a large market for VantageScore credit scores as well. In 2023, the use of VantageScore grew by 42% to over 27 billion credit scores. Furthermore, 8 of the top 10 banks use credit scores in credit decision-making for credit cards, mortgages, auto loans, and personal loans. As a result, it’s important to understand the factors that impact your VantageScore credit score as well.^[10]

Like FICO Scores, VantageScore credit scoring models consider the details found on your credit report when calculating your credit score. But the credit report categories that influence your VantageScore are a bit different, and so are their point values (aka weights).

Below are factors that make up your VantageScore (4.0) and the percentage that each category impacts your credit score.

- Payment history (41%): Payment history considers your bill-paying habits—whether you pay on time or late. Late payments can damage your VantageScore credit score for the full seven years they stay on your credit report. But as they grow older, their impact lessens.

- Depth of credit (20%): Depth of credit weighs several factors, starting with the age of accounts on your credit report. Once again, older accounts are better for your credit score. This category also considers the types of credit accounts you use, including the mixture of installment and revolving accounts on your credit report.

- Credit utilization (20%): The credit utilization category examines both revolving and installment accounts on your credit report and your relationship between the balances and available credit on those accounts. The main focus of this category is revolving credit, such as credit card accounts.

- Recent credit (11%): Recent credit is a credit score category that considers the number of recent hard inquiries on your credit report and recently opened credit accounts. However, VantageScore does count all hard inquiries that occur within a 14-day period as a single inquiry to allow for interest rate shopping.

- Balances (6%): The balances credit scoring category weighs the total outstanding debt on your credit report—including current and delinquent accounts. High balances may damage your credit score, but the impact is typically minor compared to other scoring factors.

- Available credit (2%): Available credit considers how much credit you have open on your revolving credit accounts. The more available credit you have on accounts like credit cards, the better the impact may be on your credit score.^[11]

Why do lenders use different credit score versions?

Lenders use credit scores for a variety of reasons. But the general idea of a credit score is to help predict risk. That’s why when you apply for a loan or credit card, you can almost always count on a credit score review being part of your financing application.

Many lenders opt to use FICO Scores to assess the creditworthiness of applicants. Some lenders use VantageScore credit scores instead. Yet it’s important to understand that lenders have other choices as well, and they come in the form of different credit score versions.

Since the creation of the first FICO Score in 1989 and the first VantageScore in 2006, both credit score companies have developed multiple updated versions of their credit scoring models. FICO and VantageScore have a strong interest in staying current and making sure their credit scoring models continue to do a great job at predicting consumer credit risk. (Every company wants to be the best at what it does, after all.)^[12]

Yet like any customer, lenders get to decide when (and if) they want to upgrade the credit scores they use to the newer versions that FICO or VantageScore develops. Just because a new credit score is available doesn’t mean lenders will upgrade right away. Some lenders may keep using an old credit scoring model rather than paying for a new credit score version (and all of the costs associated with upgrading). Other lenders may decide that the costs of upgrading are worth the benefits that a new credit scoring system could provide.

Because lenders make different decisions when it comes to upgrading credit scores, it’s virtually impossible for you as a borrower to know which credit score version you’ll encounter when you apply for financing. But the following chart might help.

According to FICO, the most widely used version of the FICO Score is currently FICO® Score 8. Lenders also use the following versions of the scoring model.

Equifax	TransUnion	Experian
Widely used
FICO® Score 9	FICO® Score 9	FICO® Score 9
FICO® Score 8	FICO® Score 8	FICO® Score 8
New releases
FICO® Score 10	FICO® Score 10	FICO® Score 10
FICO® Score 10T	FICO® Score 10T	FICO® Score 10T

Source: myFICO.com^[13]

Meanwhile, VantageScore has developed four versions of its credit scoring software, numbered 1.0 to 4.0. According to the credit score developer, VantageScore 3.0 and VantageScore 4.0 are its two most widely used credit scoring models.^[14]

Industry-specific credit scores

No matter which credit score a lender uses to review credit risk, it’s helpful to understand that a higher credit score works in your favor. When you have a higher credit score, it typically indicates you’re less likely to pay a credit obligation 90 days late (or worse) within the next 24 months. That prediction (also called the “stated design objective”) is the purpose of most credit scores.[15]

Base FICO Scores and VantageScore credit scores range from 300 to 850. Yet those aren’t the only types of credit scores that lenders use to predict risk. In addition to different credit score brands (e.g., FICO and VantageScore) and different credit score generations, FICO has developed industry-specific credit scores as well.

Auto credit scores

FICO® Auto Scores are special credit scores created for auto lenders. These scoring models are a version of the base FICO Score that’s adjusted to better predict a borrower’s likelihood to repay an auto loan on time. For example, your payment history on auto loans may be more important than usual in the calculation of your FICO Auto Score.

It’s also important to note that FICO Auto Scores range from 250-900 instead of the traditional 300-850 which base FICO scoring models use. But a higher credit score still equals a lower credit risk.

Below are the versions of FICO Scores most commonly used in auto lending.

Equifax	TransUnion	Experian
FICO Scores used in auto lending
FICO® Auto Score 9	FICO® Auto Score 9	FICO® Auto Score 9
FICO® Auto Score 8	FICO® Auto Score 8	FICO® Auto Score 8
FICO® Auto Score 5	FICO® Auto Score 4	FICO® Auto Score 2
FICO® Auto Score 10 (New Release)	FICO® Auto Score 10 (New Release)	FICO® Auto Score 10 (New Release)

Source: myFICO.com^[13]

Bankcard credit scores

Some secured credit cards may not require a traditional application process or credit check. But with most types of credit cards, the bank that issues the card will check your credit score when you apply for the account. Sometimes that credit score may be an industry-specific score that FICO creates called the FICO® Bankcard Score.

The FICO Bankcard score is a credit score that credit card companies use to assess the risk of applicants for new credit card accounts. This score also features a range of 250-900, and a higher score means you represent less risk to the credit card issuer just like it does with a traditional base FICO Score. A higher Bankcard Score might also help you qualify for a lower APR offer.

Below are the current FICO® Bankcard Scores most commonly in use.

Equifax	TransUnion	Experian
FICO Scores used in credit card decisions
FICO® Bankcard Score 9	FICO® Bankcard Score 9	FICO® Bankcard Score 9
FICO® Bankcard Score 8	FICO® Bankcard Score 8	FICO® Bankcard Score 8
FICO® Bankcard Score 5	FICO® Bankcard Score 4	FICO® Score 3
FICO® Bankcard Score 10 (New Release)	FICO® Bankcard Score 10 (New Release)	FICO® Bankcard Score 2
		FICO® Bankcard Score 10 (New Release)

Source: myFICO.com ^[13]

Credit scores lenders use for mortgage decisions

One of the most important times you need to understand your credit scores and the factors that affect them is when you’re preparing to buy a house. Although it’s not impossible to buy a house with bad credit, it can be an expensive and difficult process to navigate.

At present, most mortgage lenders use FICO® Scores from all three credit bureaus—Equifax, TransUnion, and Experian—to review your eligibility for a home loan. Lenders don’t use industry-specific scores for mortgage applications. But there are different credit score rules to be aware of when you apply for a home loan.

After you close on a home, a mortgage lender often sells the mortgage to Fannie Mae or Freddie Mac. These two organizations are collectively known as government-sponsored enterprises (GSEs). The GSEs set guidelines that mortgage lenders must follow in order to sell their loans, including the credit scores lenders can use to approve borrowers for financing.^[16]

Based on current GSE guidelines, most mortgage lenders use the following FICO® Scores for mortgage decisions.

Equifax	TransUnion	Experian
FICO Scores used for mortgage decisions
FICO® Score 5	FICO® Score 4	FICO® Score 2

Source: myFICO.com^[13]

At present, mortgage lenders are stuck using old versions of FICO Scores due to GSE restrictions. Yet according to the Federal Housing Finance Agency (FHFA), mortgage lenders will get the opportunity to change their credit score requirements for home loans. (Indeed, lenders must change the credit scores they use if they wish to continue selling loans to Fannie Mae and Freddie Mac.)
The GSEs will begin requiring mortgage lenders to transition to FICO 10T and VantageScore 4.0 credit scores for mortgage application review. The estimated roll out for this change is currently late 2025.^[17]

Keeping track of your many credit scores

Keeping up with your many different credit score possibilities can be almost impossible. On a positive note, you may not need to stress about small differences in your credit score. Yes, it can be helpful to monitor your credit score to make sure it remains in good condition. But you should also remember that your credit score—no matter who checks it—is based on information from your three credit reports.

Your best bet, therefore, is to focus on the factors that affect your credit scores—the information on your credit reports. Instead of obsessing about credit scores, aim to maintain positive payment history on your credit reports and avoid late payments. Another important goal is to make sure you keep your credit utilization ratio on all revolving accounts as low as possible, especially credit cards. As you follow good credit management habits, your credit score should be in good shape, no matter which model or version a lender uses to calculate it.

Sources

1. Money.CNN.com. “Why you could have hundreds of credit scores.” https://money.cnn.com/2017/01/26/pf/credit-scores/index.html
2. FICO.com. “FICO’s Adoption and Pricing in the Mortgage Origination Market.” https://www.fico.com/blogs/fico-s-adoption-and-pricing-mortgage-origination-market
3. FICO.com. “Basic Facts About FICO® Scores.” https://www.fico.com/en/latest-thinking/fact-sheet/basic-facts-about-fico-scores
4. myFICO.com. “What is Payment History?” https://www.myfico.com/credit-education/credit-scores/payment-history
5. myFICO.com. “What is Amounts Owed?” https://www.myfico.com/credit-education/credit-scores/amount-of-debt
6. myFICO.com. “What is the Length of Your Credit History?” https://www.myfico.com/credit-education/credit-scores/length-of-credit-history
7. myFICO.com. “What is New Credit?” https://www.myfico.com/credit-education/credit-scores/new-credit
8. myFICO.com. “Credit Checks: What are credit inquiries and how do they affect your FICO® Score?” https://www.myfico.com/credit-education/credit-reports/credit-checks-and-inquiries#:~:text=In%20general%2C%20credit%20inquiries%20have,or%20a%20short%20credit%20history
9. myFICO.com. “What Does Credit Mix Mean?” https://www.myfico.com/credit-education/credit-scores/credit-mix
10. VantageScore.com. “VantageScore CreditGauge May 2024: The Credit Gap.” https://www.vantagescore.com/press_releases/vantagescore-creditgauge-may-2024-the-credit-gap-consumer-credit-diverged-older-and-more-affluent-borrowers-continued-to-spend-and-pay-on-time-as-younger-consumers-increasingly-we/#:~:text=In%202023%2C%20usage%20of%20VantageScore,loans%2C%20personal%20loans%20and%20mortgages
11. VantageScore.com. “The Complete Guide to Your VantageScore.” https://www.vantagescore.com/the-complete-guide-to-your-vantagescore/
12. VantageScore.com. “About VantageScore.” https://www.vantagescore.com/company/about-vantagescore/
13. myFICO.com. “FICO® Scores Versions.” https://www.myfico.com/credit-education/credit-scores/fico-score-versions
14. VantageScore.com. “What are the differences between VantageScore models?” https://www.vantagescore.com/faq/what-are-the-differences-between-vantagescore-models/
15. Experian.com. “Credit Score Basics: Everything You Need to Know.” https://www.experian.com/blogs/ask-experian/credit-education/score-basics/understanding-credit-scores/
16. Experian.com. “Which Credit Scores Do Mortgage Lenders Use?” https://www.experian.com/blogs/ask-experian/which-credit-scores-do-mortgage-lenders-use/
17. SF.FreddieMac.com. “Credit Score Models and Reports Initiative.” https://sf.freddiemac.com/general/credit-score-models

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).