When discussing credit scores, the term most often referenced is the FICO score. This score is widely used by lenders to assess an individual’s creditworthiness. Although FICO does not disclose its exact scoring formulas, the primary categories that influence these calculations are public knowledge. Below is a comprehensive breakdown of these categories and their significance in credit scoring.

How Is Your Credit Score Determined?

Let’s delve into the mechanics behind credit score computation, which will provide insights into the fluctuations of your score.

The Impact of Payment History (35%)

Payment history constitutes a substantial 35% of your overall score. This metric primarily reflects your record of making payments on time and in full. From FICO’s perspective, your payment history serves as a strong predictor of your overall debt management capability. So, what factors contribute to your payment history? According to FICO, here are the key elements:

• Details regarding payments on credit accounts, retail loans, mortgages, and similar accounts.
• The current status of overdue payments and their history of delinquency.
• The total debt outstanding on accounts that are currently in collections.
• The frequency of overdue items appearing on your credit report.
• Any public records indicating bankruptcy.
• The duration since any accounts became delinquent, were involved in bankruptcy, or went to collections.
• The count of accounts with timely payments.

FICO evaluates these aspects by analyzing your credit report, illustrating the necessity of maintaining an up-to-date and accurate report. Late payments can have varying reporting timelines—some creditors may report after 30 days, while others may wait up to 60 days. Regularly auditing your credit report can help you keep track of any discrepancies, but as long as you have a strong history of on-time payments, you should be in a good position.

Credit Utilization (30%)

Credit utilization refers to the proportion of your available credit that you are currently using. This ratio—comparing available credit to your utilized credit—plays a crucial role in your score. For instance, if you make a $1,000 purchase on a card with a $10,000 limit, your credit utilization ratio stands at 10%. Maintaining a lower utilization rate is advantageous for your score; experts recommend keeping it below 30%. However, a utilization rate of 0% is not ideal, as it fails to provide creditors a basis to evaluate your credit habits.

Closing an older credit card can negatively impact your utilization ratio since it reduces your total available credit. Despite this, many individuals choose to close accounts to avoid annual fees for cards they seldom use. It’s wise to refrain from canceling credit lines just before seeking new loans, such as a mortgage.

Some credit advisors suggest that opening multiple new accounts can enhance your score. While this may seem counterintuitive, increasing your available limit positively affects your utilization metric. Nevertheless, practicing sound financial habits is more beneficial than focusing solely on your FICO score.

There’s a myth that carrying a balance on credit cards is necessary to build credit, but this is false. Paying in full and on time each month is what truly matters. Carrying a balance merely results in accruing interest charges, which can be substantial given the average national credit card interest rate hovering around 27%.

Length of Credit History (15%)

While the length of your credit history only accounts for 15% of your score, it remains an essential aspect. According to industry insights, this considers how long each account has been active and when the last activity occurred. Key factors influencing your credit history include:

• The total duration accounts have remained open.
• The length of time specific types of accounts have been established.
• The elapsed time since these accounts were utilized.

For newcomers to credit, achieving an excellent score may be challenging since a minimum six-month credit history is required to begin generating a score. FICO seeks a robust credit utilization history to assess long-term financial behaviors.

New Credit and Credit Mix (10% Each)

New credit and credit mix are distinct factors comprising 10% each of your score. FICO examines several elements regarding new credit:

• Number of new accounts opened recent months: Rapid opening of numerous accounts can negatively affect your average account age, particularly if your credit activity is limited.
• Recent credit inquiries: An inquiry occurs when a lender reviews your credit report. While this generally has a minor impact on your score, its influence diminishes after a couple of years.
• Time since last new account: The length of time since the last new account opening can also affect your score positively.
• Recovery from past payment issues: Overcoming late payment history is possible. Timely future payments can improve your score over time.

Credit mix refers to the variety of credit accounts held. A diverse range—such as credit cards, auto loans, mortgages, and student loans—demonstrates to lenders that the borrower is a responsible risk. FICO states:

While credit mix is rarely a central scoring factor, it becomes more relevant when your credit report lacks sufficient information.

Even though alternative credit scoring models exist, the FICO score remains the standard among lenders. Monitoring your FICO score can effectively assess your creditworthiness overall. It’s essential to remember that this score is derived solely from the details captured in your credit report. Other aspects, such as your income, employment status, and the type of credit you are applying for, may also be factors considered by lenders. For additional strategies to elevate your credit score, refer to the comprehensive tips available.