Your credit score plays a role in everything from your mortgage rates to insurance rates. So it’s probably a good idea to know how it’s determined in the first place — then you can figure out how to improve it. The important takeaway is which factors matter the most.
1. Amount of balances owed: ~35%
The ratio of credit available to you to the balances you have on your lines of credit. Essentially, it measures how much of your available credit you use. The less, the better
“having lots of available credit but only using a small percentage of it is good for your score. Having a small amount of available credit and charging up to the limit — even if you pay off the balance monthly — won’t help your score.”
2. Payment history: ~35%
Along with balances owed, payment history is the other large chunk of your credit score. This is whether you pay your credit card bills on time and in full. “How late your payments are will also affect your score,” Bera says.
“So payments that are more than 60 or 90 days late will have a bigger ding to your credit than if you are 30 days late. The good news is that if your payment is less than 30 days late, it probably hasn’t been reported to the credit bureaus yet, so make a payment — fast!”
3. Length of credit history: ~15%
This refers to how long your credit accounts have existed. A general rule of thumb is that the longer your credit history is, the better that is for your score. But, this isn’t always the case.
“People with older credit histories can have poor scores if they’ve used credit irresponsibly, while younger individuals who haven’t had credit very long, but have used it wisely, can have great scores,”.
Note that this factor measures the age of your credit history, not your individual credit cards. If you close one, it will not change the age of your history.
4. Credit mix: ~10%
This is a factor of having a variety of credit; not just credit cards, but other forms of credit such as mortgages and car loans. “Having different types of credit to your name indicates that you’re responsible and can manage your finances,”.
5. New credit: ~10%
Along with credit mix, new credit makes up the other smaller chunk of your credit score. This factor is why you don’t want to run out and apply for a bunch of new credit.
Every time you apply for new credit — say, a store credit card — that issuer looks at your credit report. This is referred to as a “hard inquiry.”
“too many hard inquiries in a short period of time will have a negative affect on your score. If you open lots of lines of credit at once, having a ton of new credit show up may ding your credit score,”.