What's In a Credit Score? Factors that Affect that All Important Number

Your credit score is kind of like a grade; the higher it is, the better you appear to be at managing your finances.  Good scores will help you get credit with ease at low interest rates. A bad score can mean no credit at all, or loans with sky-high interest rates that can leave you shelling out thousands, or in the case of something like a mortgage, tens of thousands of dollars more than someone with a more favorable financial profile. If you want to improve your score, the first important step is having a general understanding of how it is calculated.

Payment History

Your payment history is the most influential factor in calculating your credit score—it accounts for a whopping 35 percent. This is understandable since you are using someone else’s money –whether it be a bank or credit card company—and lenders are going to be very, very interested in whether or not you are timely in paying it back. Naturally, the later you are on payments and the number of delinquent payments currently outstanding, the worse your score. If you are hoping to boost your credit score and you have fallen behind on your bills, priority number one is getting back on track, not tackling high-interest cards or lowering debt utilization ratios or the other tips that help boost your score. If you have not reached out to creditors about your situation, do that as soon as possible. They want you to be able to pay your bill and they can work with you in making that happen by doing things such as setting up an alternate payment plan with a lower interest rate and monthly payment.

Amount of Debt

The amount of debt you are carrying comes in at a close second by accounting for 30 percent of your credit score. Again, this is understandable since it can give a very revealing picture of how you manage your money. The types of debt will also influence the score in numerous ways; for example, lots of credit card debt may more negatively impact your score than a large student loan. A mix of different debt can also be helpful since it shows you are responsible in using different types of credit. When it comes to credit cards, using more than 30 percent of available credit may negatively impact your score.

Length of Credit History

The length of your credit history accounts for 15 percent of your credit score. A long history of responsible use bodes well for you; if you have a shorter history, do not despair as a good payment history and low credit use will be more important anyway. If you are closing out cards as a means of managing your credit more responsibly, always keep the oldest accounts open; if you are looking to close accounts as a means of boosting your score, this is really not recommended, regardless of the age of the accounts.

New Credit

New credit accounts will make up 10 percent of your score. Obviously, frequently opening up new lines of credit, or attempting to, may be seen as a red flag. Factors considered include the ratio of new accounts to old ones, how many new accounts, number of inquiries from creditors processing your request for credit and the amount of time since the accounts or inquiries have been made. Inquiries into your own credit score or inquiries made by creditors for purposes of sending out pre-approved credit card advertisements do not count. If you are looking to get a loan for any reason, it is a good idea to avoid shopping around for new credit cards during this time.

Types of Credit

Types of credit use account for the last 10 percent of your credit score. Examples include credit cards, retail store accounts, installment loans and mortgages. A mix of credit can work in your favor, provided you are timely with your payments and use the credit responsibly. But, since it only accounts for such a small part of your score, do not worry if you do not have a mix; if you just have credit cards, do not feel the need to go out and get an installment loan for the sake of a better credit score.

Kelli Cooper is a freelance writer who enjoys sharing articles that offer helpful tips for managing your personal finances.


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