Ever wonder what goes into calculating your credit score?
When people refer to their credit score, they’re usually referring to their FICO score, which was created by the Fair Isaac Corporation. Even within FICO scores, there are variations – and each creditor could use a different model, which means the formula could vary from one lender to the next.
So while we don’t know the exact combination, we know what lends more weight to your score by category. Let’s break it down.
Which factors affect credit scores the most?
Let’s look at what FICO says goes into their own scores.
35% – Payment history
The first thing a lender looks for is if you’ve paid your previous balances on time. If you have, you’re off to a great start because 35% of your credit score is comprised of on-time payment history.
That means late payments can pull your score down quickly, while paying on time lends the most weight to a good score.
Try to pay all your bills on time. And if you think you’ll have to skip a payment, call your lender and let them know ahead of time. They’ll usually be happy to work out a payment schedule or push back your due date so you have more time to pay. It’s always worth a call to find out.
30% – Amounts owed
After payment history, the next biggest factor is how much you owe in total. It’s 30% of your overall score.
This is also where your credit utilization comes into play. If you have a credit card or line of credit with a $1,000 limit and you owe $300, you’re using 30% of your overall credit. In general, lenders like to see your credit utilization at 30% or under.
In addition to paying on time, try to keep your amounts owed to less than 30% of your overall available credit. Having a higher utilization could make you look overextended in the eyes of a lender and they’ll wonder why you’re seeking more new credit when you apply.
Before applying for a loan or credit product, try to pay down your balances so you have the highest chance of getting approved.
15% – Length of credit history
Lenders want to know how long you’ve been managing your credit. And in general, the longer you’ve responsibly kept up with on-time payments, the better.
This is calculated by getting the average age of all your accounts. It’s a great idea to keep your oldest account open so this number stays as high as possible. Once you close an account, it’s removed from your credit report.
This portion of your score also takes into account how long it’s been since you’ve used certain accounts. So if you open a credit card and don’t use it for a year or two, you won’t get as much benefit from having it open. Instead, try to put a small charge on your accounts every once in a while. It will keep your accounts active and help your length of credit history.
10% – Overall credit mix
Having a blend of different accounts helps boost your overall credit score. This mix can include mortgages, auto loans, credit cards, lines of credit, retail accounts and personal loans, for example.
So having a mortgage, an auto loan and a credit card is a stronger combination than having three credit cards. When you show you can manage different types of credit products, your credit score will benefit.
10% – New credit
This includes the number of hard credit pulls on your credit report. They stick around for up to two years and having a lot in a short amount of time can make it look like you’re seeking too much credit too quickly, which is a red flag to lenders.
Of course, sometimes you can’t avoid having several credit pulls in a row, like if you’re comparing interest rates on a loan, or have a buy a new car unexpectedly. This is only 10% of your credit score and can start recovering after just a few months.
If you can, try to space out how many new accounts you open.
Affect credit score bottom line
If you’re interested in boosting your credit score, it’s good to know what goes into the calculations. That way, you can focus on making the greatest impact in the areas that count most.
Payment history and amounts owed together make up 65% of your credit score. So the best way to raise and keep a high score is to make your payments on time, and in full when possible.
Keep your oldest accounts open and try to have a couple of different kinds of credit. Finally, try to space out your credit applications as much as you can.