What Goes Into My Credit Score?

Your credit score is one of the most important numbers of your adult life. It will determine if you are able to get a job, an apartment or a low rate on an insurance policy. It can also play a role in determining the interest rate that you receive on a loan. Therefore, it is critical that you understand what goes into your credit score and understand that it can change at any time. The main component in determining your score is your ability to pay bills when they come due. Another main component is the amount of time that you have had access to credit or have been responsible for paying off a debt balance. The type of loans that you have as well as the mix of loans that you have will also factor into the overall score. Ideally, your score will be at least 640 and can be as high as 800 under the FICO model.

1 - Payment History Makes Up 35 Percent of Your Score

Your credit score is likely to be higher if you have not missed a payment in the past. However, if you do have missed payments, start by repaying the most recent ones first. Generally speaking, lenders look less favorably on borrowers who have missed payments in the last 30 days compared to the last 90 or 120 days. Making a payment 29 or fewer days late has no impact on your credit score as it is considered to be timely for the purpose of calculating your credit score.

2 - How Much You Owe Is 30 Percent of Your Score

Ideally, you will spend less than 30 percent of your available credit. This rule applies to each card that you have as well as the total amount of credit that is available to you. Let's say that you have three credit cards with credit limits totaling $3,000. Your goal is to use less than $1,000 overall and less than $333 on each card. Furthermore, be sure to keep your total debt-to-income ratio at less than 28 percent of your income.

3 - Length of Credit History Is 15 Percent of Your Score

The more experience that you have handling credit, the better your credit score will be. While it doesn't have as much impact as your ability to pay off and manage your debt balances, it can be the difference between getting a traditional loan or a subprime loan. Ideally, you won't cancel your oldest credit cards as doing so can reduce your average credit age. If you have to cancel an account, cancel your most recent one to minimize the damage to your credit score.

4 - Credit Mix Makes Up 10 Percent of Your Score

You have a better chance of increasing your credit score by having a variety of both secured and unsecured debts. This doesn't mean that you should borrow money that you can't afford to repay. What it does mean is that taking out a small student loan or using a credit card to buy gas can make it easier to borrow money in the future. In some cases, borrowing does make sense even if you can afford to buy a home or pay for school with cash. This is because you can put the money in the stock market and grow that money faster than interest accrues on the loan.

5 - New Credit Also Makes Up 10 Percent of Your Score

If you have recently applied for a new credit card or a car loan, it could reduce your score in the short-term. Your score will drop temporarily because it could be a sign that you can't pay your bills without help. Furthermore, the fact that a lender did a hard inquiry on your credit report may also reduce your score. However, the effects of obtaining new credit generally fall away within a few months.