5 Things Affect Your Credit Score

Knowing how your credit score is calculated can help you improve it.

Man holding credit card in cafe happy about his great credit score.
Using credit the right way can increase your credit score. Tara Moore/Taxi/Getty Images

Credit scores serve several purposes. With a good credit score you can get loans faster, receive the most favorable lending rates, and have easier access to credit to buy homes, educations, business ventures, or access funds for everyday purchases. Your credit score could affect your insurance rates and potential employers may check your credit while considering you for a job.

To make the most of your credit, you need to know how your credit score is calculated.

There are five components to your score. Some carry more weight than others. Below is an outline of the five major components to your credit score according to FICO.

1. Payment history- 35%

35% of your credit score is based on your payment history. Paying on time can mean the difference between average and exceptional credit. If you have a history of paying on time across most of your accounts and have an occasional slip up and pay late, it won’t affect your credit score as much as it used to.

Here’s what you need to know:

  • A few days late does not count against you. A payment cannot be reported late unless it is 30 days or more past due.
  • The big picture matters more now. With the older system prior to 2009, one big problem could cause havoc with your credit score. Now, if all other accounts are in good shape, one serious issue will not matter as much.
  • Small problems hurt less. Previously, if you missed a small bill (less than $100), and it went to collections, you would see a negative impact on your credit score. Now your credit score will not suffer as much from a small misunderstanding.

    Since this category has such a big impact on your overall credit score, when you go through a foreclosure or short sale it is not just the foreclosure that impacts your credit, but also the months of late payments that precede the foreclosure.

    2. Amount owed- 30%

    The next major component, which accounts for 30% of your credit score, is the amount of revolving debt you owe in relation to your available balances.

    Credit cards and lines of credit are forms of revolving debt. This category is calculated on an individual account basis and an overall basis.

    For example, if you have available credit of $5,000 and you borrow $4,000 from that lender, it will show that you have used 80% of your available credit on that line or credit card. To keep your credit score high, you want to borrow no more than 30% of your available credit from any one lender. This means contrary to popular belief, it is better to owe a smaller amount on several cards than to max one card to its limit.

    The exact weighting of this factor can vary depending on how long you have been using credit. Regardless, your total amount of debt plays a big role in your credit score. It could end up having as big of an impact as your payment history.

    To improve this part of you score you can call lenders and ask them to increase your available credit. As long as you don’t borrow more, this increase in available credit will help your overall credit score. In the credit industry, this is called credit utilization.

    3. Length of credit history- 15%

    Your length of credit history comprises about 15% of your score. People with credit scores over 800 typically hold at least three credit cards (with low balances) which they have had open for over seven years each.

     

    As you pay off debt, do not close out that credit card or credit line. Instead, consider using it to pay a small monthly bill that you pay off each month. Research shows that people with the best credit history pay off credit cards each month so a small amount of activity paid in full each month can help boost your credit score.

    4. Inquiries and new credit- 10%

    Inquiries and new debt account for about 10% of your score. The good news; if you are shopping for a house, all mortgage inquiries within 30 days of each other will be grouped as one inquiry. For autos, it is a 14 day limit but different scoring systems outside of FICO may vary. When shopping for credit, submit applications within a few days of each other so that inquiries are bunched together.

    5. Credit mix in use- 10%

    The last 10% of your score is based on the type of credit; installment vs. revolving debt.

    Installment debt, such as an auto loan, is looked upon more favorably than revolving (credit card) debt. In addition, with the 2009 changes, you now get points for your ability to successfully manage multiple types of debt; a mortgage, auto loan and credit cards, for example.

    When you add all this up what is a "good" credit score? If you want the best rates on a mortgage once you are retired, shoot for a score of 780 or higher.  Anything over 750 is considered to be excellent but the higher the better. A good credit score falls in the 700 - 749 range, with 650 - 699 being "fair".  If you score is 649 or start taking actions that can improve it.