Your credit score is a summary of your financial habits, calculated using information from your credit report. While the exact formulas are proprietary, scoring models like FICO® and VantageScore are transparent about the key categories of information they use. According to FICO, these factors are grouped into five main categories, each with a different level of importance.
1. Payment History (35% of FICO Score)
This is the most significant factor. It tracks whether you have paid your past credit accounts on time. A consistent record of on-time payments will have a positive impact on your score.
- What helps: Paying all your bills, including credit cards and loans, on time.
- What hurts: Late payments (30 days or more), accounts sent to collections, and major negative events like a bankruptcy or foreclosure. These items can stay on your credit report for seven years or more.
2. Amounts Owed (30% of FICO Score)
This category focuses on how much debt you carry, particularly your credit utilization ratio. This ratio compares the amount of revolving credit you’re using to your total credit limit. Lenders see high utilization as a sign of financial stress.
- What helps: Keeping your overall credit utilization below 30%. For example, if you have a total credit limit of $10,000 across all your cards, you should aim to owe less than $3,000 at any given time.
- What hurts: Maxing out your credit cards or carrying high balances, which signals risk to lenders.
3. Length of Credit History (15% of FICO Score)
A longer credit history generally improves your score. This factor considers the age of your oldest credit account, the age of your newest account, and the average age of all your accounts. A lengthy history demonstrates your ability to manage credit responsibly over time.
- What helps: Keeping old credit accounts open, even if you don’t use them often. This preserves the average age of your accounts.
- What hurts: Closing your oldest credit card, which can lower the average age of your history and potentially increase your credit utilization ratio.
4. Credit Mix (10% of FICO Score)
Lenders like to see that you can responsibly manage different types of credit. A healthy credit mix includes both revolving credit (like credit cards) and installment loans (like mortgages, auto loans, or student loans).
- What helps: Successfully managing different types of debt over time.
- What hurts: Only having one type of credit, like only credit cards. However, you should not open new accounts and take on debt just to improve your credit mix.
5. New Credit (10% of FICO Score)
This factor considers how many new accounts you’ve opened recently and how many hard inquiries have been placed on your report. Opening several new credit accounts in a short time can suggest you are a higher-risk borrower.
- What helps: Limiting how often you apply for new credit.
- What hurts: Applying for multiple credit lines in a short period. An exception is rate shopping for a mortgage or auto loan; multiple inquiries within a 14-45 day window are typically treated as a single inquiry by scoring models.
What Doesn’t Affect Your Credit Score?
It’s also important to know what does not impact your credit score. Common misconceptions include:
- Your Income or Employment History: While lenders consider this when you apply for a loan, it’s not part of your credit score calculation.
- Checking Your Own Credit: Reviewing your own score or report results in a “soft inquiry,” which has no effect on your score.
- Debit Card Usage: Using a debit card draws money directly from your bank account and is not reported to credit bureaus.
- Age, Race, or Marital Status: By law, credit scoring cannot consider personal information like this.
By understanding these key factors, you can take control of your financial habits and work toward building a stronger credit score, which can lead to better loan terms, lower interest rates, and significant savings over time.
For more details on credit scores, the Consumer Financial Protection Bureau (CFPB) offers comprehensive, free resources for consumers.