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The 5 Factors That Make Up Your Credit Score (+ How To Improve Them)

The 5 Factors That Make Up Your Credit Score (+ How To Improve Them)

Master the two highest-ranking elements for good credit; ace the others to raise your credit score to impressive heights and beyond. 

Have you ever wondered how the factors that make up your credit score work?

This three-digit number depends on everything from your history of late fees to whether you still have that credit card you opened in college.

Strangers in finance use your credit score to grade your credit health and judge your understanding of debt. 

High credit scores show you’re financially responsible. And this makes it easier to qualify for a low- interest mortgage, personal loan, or credit card.

A credit score in the tank says just the opposite. You’ll have to pay higher interest fees if you don’t face outright rejection altogether.

So the first step to boosting your credit is understanding where this number comes from.

The three credit bureaus (Experian, Equifax, and TransUnion) collect information about your financial life every second of every day.

They then share this data with credit score companies. They use secret, proprietary algorithms to generate a three-digit number based on the numbers and patterns in your credit report.

There are two major credit scores: the FICO credit score and the VantageScore.

FICO scores are the most popular; 90% of the top lenders use them to make their financial decisions[*].

However, your FICO and VantageScores shouldn’t differ too much since they’re based on the same intel found in your credit report. 

Both VantageScores and FICO credit scores range from 300 to 850. 

Anything above 700 is considered a “good” credit score. Most Americans fall between 670 and 740.

The factors used to determine your credit score are weighted similarly by each company.

This means certain behaviors and activities matter more than others. 

Think of it like earning good grades in school. While a midterm makes up 30% of your grade and a paper only counts for 10%, all of them affect your final average.

So here’s what makes up the number that is your credit score:

#1. Payment History: The Most Important Factor

The credit bureaus log data every time you make or miss a payment for your credit cards, mortgage, auto or student loans, etc.

Your history of these payments is the biggest factor used to determine your credit score. It’s worth 35%.

Lenders strongly believe your past long-term behavior can predict your future financial behavior. 

So if you’ve always made your credit card payments on-time and in full, lenders assume you’re reliable and will continue to manage your debt responsibly. 

But certain behavior will damage your payment history and wreck your credit score, such as making late or missed payments, repossessions and foreclosures, tax liens, wage garnishments, and more.

FICO data shows someone with a 780 credit score who has never missed a payment could lose as much as 110 points from being 30 days late with one[*].

To improve your payment history:

  • Always make your payments on time.
  • Create reminders on your calendar and alarms on your phone before your due dates.
  • Set up AutoPay so your bills get paid automatically and you won’t forget.
  • Move due dates so they occur around payday and you’ll be more likely to afford your payments.
  • Never let an account get sent to collections. This tells lenders they’ll need to chase you down to pay them back, and that’s not a cute look.

Improving your payment history is a lot like working out; it may take a few consistent months to notice any real results. 

But improving your credit utilization makes major impacts — fast.

#2. How Close You Are to Maxing Out Your Lines Of Credit

Your credit utilization rate is the second biggest component of your credit score. 

It shows lenders your outstanding debt versus your maximum spending limits, across all your lines of credit. And it’s worth a whopping 30%.

While lenders expect you to carry a balance, they do not want cardholders continually maxing out their lines of credit. They fear you’ll pile up so much debt you’ll never be able to pay them back.

Do you know your credit utilization ratio?

Just divide your total credit card balances by your total credit card limits.

So let’s say you have two credit cards and they each have a $5,000 limit. Your total credit card limit is $10,000.

If you have a $3,000 and $1,000 balance on each card, your total credit card debt equals $4,000.

To get the credit utilization rate in this example, divide the total debt ($4,000) by the total line of credit ($10,000).

$4,000 divided by $10,000 equals 0.4.

Convert that to a percent and you get a credit utilization ratio of 40%. 

Easy peasy.

You may also need to consider installment loans for your car or student debt if you have them as well. 

See Also

To improve your credit utilization:

  • Pay off your balances in full each month.
  • Keep credit card balances under 15% to 25% of each card’s credit limit.
  • Aim for a 30% total credit utilization ratio or less.
  • Set balance alerts so you know when you’re close to your limits.
  • Pay down your debt with a personal loan. If you’re over the 30% utilization ratio, consider a personal loan to help pay off your debt and tip the scales in your favor.
  • Make additional payments during the month so you chip away at your debt instead of only paying the interest. 

People who ace these top two factors — by having excellent payment history and low credit utilization — will almost always have a good credit score.

The remaining factors can boost your credit to the awesome range or drag it down to less-than-average.

#3. How Long You’ve Been Managing Credit

Your credit history makes up 15% of your credit score.

It includes the average age of your current accounts and the most recent activity on those accounts. 

Lenders use this information to figure out how long you’ve been managing your lines of credit.

Longer credit histories give lenders extra data to read and assess patterns. The longer you maintain solid credit history, the more experienced and trustworthy you’ll look.

People with little to no credit history may seem riskier to lenders because their experience borrowing and paying back debt is unknown and untested.

To improve your credit history:

  • Build credit smartly. If you’re short on credit history, apply for a low-interest credit card and start making a few small purchases each month. Pay off more than your minimum balance and you’ll establish a pattern of responsible behavior.
  • Don’t close accounts in good standing. Closed accounts remain on your credit report for up to 10 years. Then they drop off and you’ll lose the activity and age of that account. Canceling a card with a long account history will lower your total age of accounts and may drop your credit score.
  • Don’t open many new accounts too close together. Every new account lowers your average age of accounts and may decrease your credit score. 

Knowing how to pay off various types of debt also goes a long way. 

#4. Your Experience Managing Different Debt

Your credit mix makes up 10% of your credit score.

You’ll rank higher if you have experience with both installment loans (or those with a set number of equal payments) and revolving credit (i.e., credit cards).

Your credit mix tells new lenders that other lenders have deemed you trustworthy before. It also proves you can manage several types of credit lines well.

To improve your credit mix:

  • Open at least one credit card and start building revolving credit.
  • Consider loans when appropriate. Credit mix only counts for 10% of your score, so it’s not worth taking out an installment loan if you don’t need one. But paying off debts with a personal loan will diversify your credit mix and improve your credit utilization.

Finally, you may not have to do anything to improve the last element that makes up your credit score.

#5. Whether You’re Looking To Take On New Debt

New credit and hard inquiries on your credit report count for 10% of your credit score.

Each time you apply for a loan or line of credit, lenders check your credit history. This is known as a hard inquiry or a hard pull.

Hard inquiries help lenders decide whether you can handle new debts considering your current ones. But each hard pull may also lower your credit score by up to five points.

Your on-time payments will eventually counteract this drop in your credit score after a few months.

To improve your new credit:

  • Try not to take on new debt. This shows lenders you’re not desperate for cash or borrowing more than you can pay off.
  • Do not open more than one new line of credit per year. Only hard inquiries made within the last 12 months count towards your credit score. Inquiries then vanish from your credit report after 24 months.
  • Group several hard inquiries so they count as one. If you’re shopping around and comparing loan rates, algorithms count multiple hard inquiries in a short time as a single pull. Complete your applications within 15 to 45 days of each other and you’ll only take the hit to your credit score once.

Now Give Your Credit Score a Check-Up

Certain credit card companies offer free credit score monitoring so you can watch how it changes every month based on your behavior. 

The two most important activities that affect your credit score are easily within your control. Make your payments on time and pay down your balances to lower your utilization ratio.
And if you’re thinking about applying for a mortgage, loan, or credit card, give yourself at least six months to correct your weak areas, improve your credit score, and qualify for the best rates.

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