How Your FICO Credit Score Is Calculated


Miles & Points For Beginners

Part 1 – Starting With The Basics

Part 2 – How Your FICO Credit Score Is Calculated

Part 3 – All About U.S. Airline Loyalty Programs – American & United

Part 4 – All About U.S. Airline Loyalty Programs – Delta & Southwest

In the last installment, we started out with very basic information.  I had you choose a goal destination.  This destination is a place that you will focus on traveling to while learning about how to collect miles and points.  We also briefly talked about the different credit bureaus and how to get a copy of your credit reports.  Today I want to go a little further into credit scores and how they are calculated.

Credit 101

Most banks use a proprietary score called your FICO score.  This score ranges from 300-850, although about half of the population falls between 600-750. (To get most rewards credit cards it is believed a 700 FICO score at the very minimum is required.)  It is important to understand that this score is the most important thing that banks look at when determining your credit worthiness.  Understanding how it is calculated will help to ensure you don’t make silly mistakes that cause it to drop.

What Makes Up The Score

credit score

Payment History 35% – The first factor and largest factor at 35% is your payment history.  This takes into account how you pay your bills.  On time payments are good, while late payments, collections, judgments and bankruptcy are bad.  It is also important to understand that recent activity has a greater weight than old activity.  It is imperative that you pay all of your bills on time or your credit score will suffer tremendously.

Amounts Owed 30% – The banks look at something called your utilization ratio.  This ratio measures the percentage of debt you have compared to your total credit.  For example, if you have $100,000 in credit lines and owe $10,000 on your cards, then your utilization rate is 10%.  They also look at the utilization ratio on individual cards.  People who owe a large amount relative to their credit limit are much higher risks.

Length of Credit History 15% – This is fairly simple.  The older your accounts are, the higher your score.  The main way this is calculated is by averaging your accounts.  By doing this they determine the average age of your accounts and use that for your score.

New Credit 10% – Statistics show that people who apply for a lot of new credit are at a higher risk of non repaying their debts.  This factor looks at your credit inquiries and new credit taken out.  Most of the time when you apply for a mortgage or a car and have several inquiries, they are lumped together as one.

Types of Credit Accounts 10% – Banks are looking for the diversity of your credit.  For this purpose they look for a mix of both installment loans (mortgage and auto) and revolving credit (credit cards & store cards).

How Getting Travel Cards Or Churning May Affect Your Credit

If you look at the factors above, then there should be no doubt that applying for travel credit cards will have some effect on your credit.  What exactly that effect is depends on your situation and is not something I can say.  What we can look at is how each of those scoring factors is affected by opening travel credit cards or “churning”.

Payment History – This is the largest factor.  Opening up new accounts and paying them on time should actually help your credit.

Amounts Owed – Opening new accounts should increase your total credit available.  In my case, when starting out, my score increased over time because my credit utilization was much lower due to increased credit lines.

Length of Credit History – This will definitely take a hit.  Luckily it is one of the smaller factors.  Opening up new credit accounts will lower your overall age of credit accounts.

New Credit – Applying for cards and getting a lot of inquiries will definitely affect your score.  In my experience each inquiry lowers my score by a couple of points, but it seems to recover within a couple of months.  Once again this is one of the smallest factors.

Types of Credit Accounts – This is mostly a wash.  You will definitely have more credit cards, but if you also have mortgage or car loans it should be alright.  It is unfortunate that those people with no mortgage or installment debt are actually punished with this factor.

If we look at the factors and percentages above, it is clear that some of the higher weight categories actually benefit from churning while some of the lower weight categories suffer.  This was only my personal situation, but after my first year of churning, my credit score increased by about 25 points.

Credit Karma has a report card that grades you on all of these factors.
Credit Karma has a report card that grades you on all of these factors.


Now that you have a better understanding of your score, I have a few closing suggestions.

  • Take a look at your credit report with each of these factors in mind.
  • Go to Credit Karma and look at the “Credit Report Card”.  It basically gives you a letter grade for each of these factors.
  • This is a personal preference, but I never go over 33% of my credit line on a card. (Typically well below that.) The balances reported on your credit report are typically, but not always, sent when the statement closes.  Paying your card down or off completely before the statement closing date will help to ensure your utilization ratio is low.  I do try to leave a balance on some of my cards when the statement prints, because there has been some suggestion that a 0% utilization is a negative factor for banks. Understand by leaving a balance I only mean when the statement prints.  As I said in the previous installment, I ALWAYS pay my credit cards off each month and NEVER carry any debt.


Now that you have your credit report, have signed up for Credit Sesame and Credit Karma and have an idea at what your score is, it is time to study the hotel and loyalty programs.  In the next post I will go over some of the major airline programs and where they can take you.  If you have any questions, comments or concerns, please leave them below!




Disclaimer: Miles to Memories & the author are not credit providers and do not provide personal financial or professional advice or credit assistance. The information published on this site/page is of a general nature only and does not consider your personal objectives, financial situation or particular needs. All information published here is my own personal opinion and comes from personal experience.  The information published on this site/page should not be relied upon as a substitute for personal financial or professional advice. Miles To Memories and the author strongly recommend that you seek independent advice before you apply for any product or service, which is described on the site/page.

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  1. […] One other benefit of getting a new American Express card is that they backdate the account on your credit to when you opened your first American Express account. Getting off the blacklist not only means access to new products and sign-up bonuses, it also can help your average age of accounts! […]

  2. I use How do you calculate average age of accounts credit karma states my average age is 2 – 4 years on open accounts and my math adds up to 706 months divide by 12 open accounts 5yrs 8mths, can I dispute that.

    • Credit Karma does their own calculation which may be different than what the banks use. There really isn’t anything to dispute as long as the account dates are correct on your credit report. Each agency will make that calculation for themselves.


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