What Makes Up a Credit Score?
Brooke Vaughan // July 22, 2021
A good credit score can open a lot of doors. It can make it easier to get a personal loan, buy a car, secure good interest rates on credit cards, and more. On the flip side, a bad credit score can produce a lot of personal and financial issues.
The first step of improving your score is understanding what factors into it so that you can take the necessary steps to manage your finances, debts, and bills effectively.
What Is a Credit Score?
A credit score is a numerical representation of your creditworthiness and how likely you are to repay borrowed money. It is largely based on the marks, both positive and negative, in your credit report. Your credit score is especially valuable to financial institutions and other lenders when they are deciding whether or not to approve you for a loan, credit card, or other financial assistance.
There are many different scoring models, but FICO is the most popular. FICO scores range from 300–850 and are used by about 90% of financial institutions and lenders to determine your competence with finances. In general, a higher credit score indicates that you are more trustworthy with credit from lenders.
When calculating your score, credit scoring agencies use the information in your credit reports from three notable reporting companies: Equifax, Experian, and TransUnion.
What Affects Your Credit Score?
For the FICO scoring system, there are five things that factor into your credit score: payment history, credit utilization, credit history length, credit mix, and new credit.
Accounts for 35% of your credit score
How reliable are you with paying bills and debts by their due dates? If you pay your bills on time or early, your payment history will positively impact your credit score.
If you miss a credit card payment and your credit card issuer reports it to the credit reporting agencies, you will receive a negative mark on your credit report, which will cause your score to go down.
Accounts for 30% of your credit score
What percentage of your total credit are you using? Popular credit scoring agencies recommend that you keep your credit utilization below 30%. For a card with a credit limit of $1,000, your maximum credit card balance should only ever be about $300.
The closer that you are able to keep this ratio, the more positively your credit utilization will impact your score.
Credit history length
Accounts for 15% of your credit score
How long have you had credit? The longer that you’ve been building your credit portfolio, the more credit history length will positively impact your score.
It not only matters how long you’ve had available credit but also how active you’ve been on those accounts. For instance, if you opened a new credit card account 20 years ago but haven’t used the card in a decade, this will not exactly give your credit score a boost. Financial institutions and lenders want to see that you’re using and repaying your credit; if you’re not using it at all, they cannot accurately assess your creditworthiness.
Accounts for 10% of your credit score
How many different types of accounts are in your portfolio? The more diverse your portfolio is, the more positively your credit mix will impact your credit score.
Credit can be divided into two prominent categories: revolving credit and installment loans.
- Revolving credit: A type of credit that does not have a fixed payment schedule. You can use the credit as needed, pay off your balance, and continue to reuse the credit (e.g. credit cards)
- Installment loans: A type of credit or loan that is repaid over a period of time in scheduled payments (e.g. mortgage, car loan, personal loan)
Accounts for 10% of your credit score
How much credit has been opened or attempted to be opened recently? New credit can cause your score to dip slightly. Things that qualify as new credit include:
- Opening a new credit card
- Taking out a loan
- Hard inquiries by financial institutions or lenders before making a lending decision
Other Credit Scoring Models
There are a number of scoring models, and some may take a slightly different approach to calculating your credit score.
VantageScore, another popular type of credit score, develops your score slightly differently from FICO. Rather than giving each area a percentage, VantageScore calculates it based on how influential different aspects of your credit landscape are.
In this model:
- Total credit usage, balance, and available credit: Extremely influential
- Credit mix and experience: Highly influential
- Payment history: Moderately influential
- Age of credit history: Less influential
- New account opened: Less influential
The most recent version of the VantageScore model uses the same 300-to-850 scoring system as FICO scores; however, by ranking the different factors from less influential to extremely influential, Vantage has a different method of finding that number.
What Doesn’t Affect a Credit Score?
Only credit-related information, predominantly found on your credit report, is used to calculate a credit score. Your score excludes personal information, such as:
- Marital status
- Religious or political affiliations
- Income, or if you receive compensation of any other kind
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