What is a Credit Score and How is it Calculated?

Your credit score is one of the most important numbers in your financial life. It determines whether you can get a loan, what interest rate you'll pay, whether you can rent an apartment, and sometimes even whether you'll get a job. Yet most people have only a vague understanding of how it actually works. This guide explains everything clearly.

What is a credit score?

A credit score is a three-digit number — typically ranging from 300 to 850 — that represents your creditworthiness. Lenders use it to quickly assess how likely you are to repay a debt. A higher score means you're considered lower risk, which translates to better loan terms and lower interest rates.

Credit scores are calculated by credit bureaus (also called credit reporting agencies) using information from your credit history. The most widely used scoring model is FICO, developed by the Fair Isaac Corporation.

How is a credit score calculated?

The FICO score is calculated from five factors, each weighted differently:

• Payment history (35%) — whether you've paid past bills on time. This is the most important factor. Late payments, defaults, and bankruptcies have a significant negative impact.
• Credit utilisation (30%) — how much of your available credit you're using. Using more than 30% of your credit limit tends to lower your score. Lower utilisation is better.
• Length of credit history (15%) — how long your accounts have been open. Older accounts with good payment history are positive signals.
• Credit mix (10%) — the variety of credit types you have — credit cards, loans, mortgages. A diverse mix is slightly positive.
• New credit (10%) — how recently you've applied for new credit. Multiple applications in a short period can lower your score temporarily.

What do the score ranges mean?

FICO scores are generally interpreted as follows:

• 800–850: Exceptional — you'll get the best rates available from any lender
• 740–799: Very good — above average; access to most loan products at good rates
• 670–739: Good — near or slightly above average; most lenders will approve you
• 580–669: Fair — below average; some lenders will approve you but at higher rates
• 300–579: Poor — significantly below average; approval is difficult and rates are very high

How to improve your credit score

The most impactful things you can do to improve your credit score are:

• Pay every bill on time, every time — payment history is 35% of your score. Even one late payment can have a significant negative impact.
• Reduce your credit utilisation — pay down credit card balances so you're using less than 30% of your available limit. Lower is better.
• Don't close old accounts — closing old credit cards reduces your available credit and can shorten your average credit history, both of which hurt your score.
• Avoid applying for multiple new credit accounts at once — each application triggers a hard inquiry which temporarily lowers your score.
• Check your credit report for errors — errors on your credit report can unfairly lower your score. You're entitled to a free report annually from each bureau.

How your credit score affects borrowing costs

The difference between a good and excellent credit score can be worth thousands over the life of a loan. On a $300,000 mortgage over 30 years, a borrower with a 760+ score might get a rate of 6.5% while someone with a 620 score might be offered 8.5% — a difference of $130,000 in total interest paid.

This is why building and maintaining a strong credit score is one of the highest-return financial habits you can develop. Use our loan calculator to see exactly how much different interest rates affect your total borrowing cost.