How is your credit score determined?

Start investing
Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

Credit scores are a little like doormen — depending on their quality, they’re either opening doors for you all over town or slamming them in your face just for kicks. Not only do credit scores dictate whether a bank will lend you money to finance a home or car, they’re also now a pretty standard metric for landlords, insurers and even sometimes employers to judge whether you're a good bet or not.

While reports from the big three credit reporting agencies Equifax, Experian and TransUnion provide dry non-judgmental accounts of your credit history, the FICO score reduces your entire financial trustworthiness into a three digit number. FICO stands for Fair Isaac & Company. Sadly, there’s not an ancient little fellow named “Fair Isaac” who computes each score on an adding machine; Fair Isaac was the 1956 collaboration of engineer Bill Fair and mathematician Earl Isaac. FICO's speciality is “predictive analytics,” meaning if you’ve been the type to default on your debts in the past, you’re probably the type to default on them in the future.

FICO scores range from 300 to 850, and the higher the the better. The credit world shall be your oyster with anything over 740. But those with scores under 620 are ineligible for mortgages underwritten by Fannie Mae or Freddie Mac, and will likely get saddled with very high interest mortgages if they can find anyone to even lend to them.

Though FICO isn’t forthcoming about the exact formula they use to compute the score, according to Money magazine, these are the weights they assign to various factors: 35% is payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used. Late and missed payments are devastating. A long track record with a couple cards can be helpful, but opening too many credit cards may erode your score. A FICO score probably took decades to establish, so fixing a lousy one overnight is impossible. FICO itself describes it as a process as arduous as losing weight. Actionable fixes involve thoroughly checking with credit reporting agencies to make sure that you haven’t been mistakenly recorded as missing payments. The biggest fix, is, no surprise, bringing your balances down across the board.

Last Updated March 5, 2020

Trade stocks commission-free

Start trading