Your credit score is one of the most important measures of your creditworthiness. For your FICO® Credit Score, it’s a three digit number usually ranging between 300 to 850 and is based on metrics developed by Fair Isaac Corporation. The higher your score is, the less risky you are to lenders. By understanding what impacts your credit score, you can take steps to improve it.
The five pieces of your credit score
Your credit score is based on the following five factors:1
- Your payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. Payments made over 30 days late will typically be reported by your lender and hurt your credit scores. How far behind you are on a bill payment, the number of accounts that show late payments and whether you’ve brought the accounts current are all factors. The higher your proportion of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your score.
- How much you owe on loans and credit cards makes up 30% of your score. This is based on the entire amount you owe, the number and types of accounts you have, and the proportion of money owed compared to how much credit you have available. High balances and maxed-out credit cards will lower your credit score, but smaller balances can raise it – if you pay on time. New loans with little payment history may drop your score temporarily, but loans that are closer to being paid off can increase it because they show a successful payment history.
- The length of your credit history accounts for 15% of your score. The longer your history of making timely payments, the higher your score will be. Credit scoring models generally look at the average age of your credit when factoring in credit history. This is why you should consider keeping your accounts open and active. It may seem wise to avoid applying for credit and carrying debt, but it can actually hurt your score if lenders have no credit history to review.
- The types of accounts you have make up 10% of your score. Having a mix of accounts, including installment loans, home loans, and retail and credit cards may help improve your score.
- Recent credit activity makes up the final 10%. If you’ve opened a lot of accounts recently or applied to open accounts, it may suggests potential financial trouble and may lower your score. However, credit scoring models are also built to recognize that consumers who are shopping for a loan aren’t necessarily extra risky.
Ultimately, the best way to help improve your credit score is to use loans and credit cards responsibly and make prompt payments. The more your credit history shows that you can responsibly handle credit, the more willing lenders will be to offer you credit at a competitive rate.