This topic can get lengthy, so we’re going to keep it short and give you just what you need to know about how credit scores are calculated. The first thing to know is that there are many ways of calculating a credit score – these are known as scoring models. The two most prominent scoring models are FICO (which stands for Fair Isaac and Company) and VantageScore. FICO is the most used by lenders; VantageScore is used by folks like Credit Karma and Credit Sesame. Here’s how they’re calculated:

FICO

Payment history: 35%

Credit utilization: 30%

Length of credit history: 15%

Credit diversity: 10%

New credit: 10%

VantageScore

Payment history: 40%

Length of credit history and credit diversity: 21%

Credit utilization: 20%

Total balances: 11%

Recent behavior: 5%

Available credit: 3%

Glossary of Terms

Length of credit history. Sometimes known as credit age, this is a measure of how long you’ve had credit. The longer, the better.

Credit utilization. This is what percentage of your available credit card balances you’re using. As a rule of thumb, try to keep it under 15%.

Credit diversity. People use different terms for this (credit use, types of credit, etc.) but what it really measures is how diverse your credit is. More diversity is good: If you’re able to successfully manage multiple types of credit, that’s a sign that you’re responsible and credit-worthy, so your score will go up.

New Credit/Recent Behavior. Basically, this is credit inquiries (but in the case of VantageScore can include newly opened accounts). They don’t like to see a bunch of inquiries or new accounts all at once.

Available Credit. This is the total amount of credit you have available to use, without taking into account your balances.

The Takeaway

As you can see, for both models, payment history is #1. We’ve said it before and we’ll say it again: do everything you can to make payments on time. For more about how to successfully manage your debts and pay them the smart way, read more here.

In second place is credit utilization. Get those balances under 10-15% and you’ll be amazed at the quick effect it has on your credit score. Credit cards are the primary place you’ll focus on to show good credit utilization – Learn how to get and manage a credit card, even with bad or no credit, here.

And in third place: your length of credit history. This is one that people overlook and misunderstand a lot. In short: be careful about closing credit card accounts and opening new accounts. That old credit card you never use? If you’re repairing your credit, it might be worth keeping it around because it’s the oldest piece of credit you have on record, so it’s actually helping. Learn about credit history here.