Are you aware that your credit score is crucial to your financial life? It affects your ability to get approved for loans or credit cards and the interest rates you get on them.

Understanding what makes up your credit score and its calculation is essential to ensure a better financial future.

Join us as we dive deep into the world of credit scores and uncover crucial tips to improve your credit score!

Analyzing Each Factor’s Contribution to Your Overall Score

credit score graph
  1. Payment history (35%): is the most significant aspect of your credit score, which reflects how consistently you have made timely payments for various accounts such as credit cards, installment loans, mortgages, etc. Late or missed payments can negatively impact this portion of your score.

  2. Credit utilization (30%): is the amount owed relative to available limits on revolving accounts like credit cards. Maintaining low balances and keeping utilization below 30% will contribute to this part of your FICO Score.

  3. Length of credit history (15%): considers the age of both open and closed accounts and their average age across all lines. A longer positive track record with managing debts responsibly contributes significantly towards building a good credit score.

  4. New inquiries (‘hard inquiries’) (10%): is an essential factor in calculating scores is the number of new credit lines applied for; multiple applications in a short period may appear risky to lenders. Too many hard inquiries in a short time can lead to lower existing limits and reject further requests, as borrowers seem desperate for additional funds.

  5. Credit mix (10%): evaluates the diversity of account types in your credit portfolio, such as installment loans, revolving accounts like credit cards, and mortgages. A healthy mix demonstrates that you can manage various forms of debt responsibly.

We will now discuss each factor that makes up a credit score in detail.

Payment History

This critical factor determines your creditworthiness, making it essential to maintain good payment habits.

What Is Payment History?

Payment history refers to how you have managed your credit accounts and loans over time. It includes information on whether you have made payments on time or missed any payments, how long overdue they were, and if any collections or legal actions were taken against you due to non-payment.

How Is Payment History Calculated?

The calculation of payment history considers several factors:

  • Past Due Accounts: If you have ever been late with a payment, it will negatively affect your credit score. The longer an account remains past due, the more severe its impact will be.

  • Collections & Charge-Offs: If an account goes into collection status or gets charged off as bad debt (meaning creditors don’t expect repayment), it can stay on your report for up to seven years from when reported as delinquent the first time.

  • Late Payments Frequency & Severity: If there are multiple late payments within a short period or a single very late payment (60 days+), this could severely damage one’s credit scores even though they have no other negative information on their file.

Tips To Improve Your Payment History

  1. Create A Budget: Creating a budget allows you to plan your expenses ahead of time so you can pay bills promptly without being late.

  2. Schedule Automatic Payments: Scheduling automatic payments ensures timely payments of bills without remembering the due date.

  3. Set Up Payment Reminders: Setting up payment reminders will help you keep track of your bills and avoid late payments.

Key Takeaway: Maintaining a good payment history is essential for building and maintaining a solid credit score. Paying your bills on time and avoiding collections or charge-offs can improve your chances of getting approved for loans with favorable terms.

Credit Utilization

Your utilization ratio is essential aspect lenders examine while granting loans.

Why Is Credit Utilization Important?

Lenders and creditors determine your credit utilization to indicate how well you manage debt. For example, maxing out all your cards or having a high balance on one card may signal that you need help managing debt or living beyond your means.

The general rule is to keep your overall credit utilization below 30%. So, for example, if all of your combined credit limits together equal $10,000, keeping balances below $3,000 will help maintain good scores.

How Is Credit Utilization Calculated?

  • Add up all outstanding balances across each account

  • Add up all maximum amounts allowed for borrowing (credit limit) from each account

  • Divide outstanding balances by the maximum amounts allowed for borrowing (credit limit)

Tips for Maintaining Good Credit Utilization

  • Paying off debts regularly can reduce overall debt levels and improve scores over time.

  • Avoid opening too many new accounts in a short period since lenders view it negatively when they see someone applying for multiple lines within a short span.

Key Takeaway: Managing credit utilization is vital to maintaining a good credit score. Paying off debts regularly, avoiding opening too many new accounts in a short period, and keeping balances below the total borrowing maximum are all ways to help maintain good scores. 

Length of Credit History

Your credit history considerably influences your credit score, demonstrating your credit usage duration and management effectiveness. 

What Is Considered a Good Length of Credit History?

The longer your credit history, the better it is for your overall score. A good length of credit history means that you have had an active account for at least six months and preferably more than two years.

If you are starting to build up your credit, time will help improve this aspect of your score.

How Is Your Length Of Credit History Calculated?

The calculation takes into account several factors:

  • The age of each individual account on file

  • The average age across all accounts

  • The date when each account was last used or updated

New, recently opened accounts may lower the average age across all accounts and negatively affect the final result.

Tips To Improve Your Length Of Credit History Score

  1. Avoid closing old accounts as they contribute positively to this section’s calculation.

  2. Maintain low balances on existing revolving lines like loans or credit cards since high utilization can harm payment records and total available credits (credit mix).

  3. Create multiple financial products, such as installment loans with fixed payments, instead of relying only on one type. Having many different unsecured debt instruments, such as personal and secured ones like car loans or mortgages, will show lenders that the borrower can manage other types of credit.

Key Takeaway: In order o maintain a long credit history, it is essential to keep existing accounts open, maintain low balances on revolving lines of credit, and create multiple financial products. This way, it shows lenders that the borrower is responsible and can be trusted with other types of credit.

New Credit

When you apply for new credit lines, it can affect your credit score in various ways.

Credit Inquiries

Whenever you apply for new credit, whether a credit card or loan, the lender will likely check your credit report to determine if they should approve your application. Unfortunately, this “hard inquiry” can lower your score by a few points.

However, not all inquiries are created equal. For example, if you’re shopping around for the best rate on a mortgage or auto loan, multiple inquiries within a short period (usually 14-45 days, can vary depending on the scoring model) will typically only count as one inquiry since they indicate that you’re comparing rates rather than trying to open several lines of new credit.

Steps to Reduce the Impact of Multiple Hard Inquiries

  • Space Out Applications: Space out your credit applications over a few months rather than applying for multiple credit lines within a short time.

  • Apply for Similar Credit Products: If you are applying for various credit cards or personal loans, consider applying for them simultaneously. It will be treated as a single hard inquiry on your credit report.

  • Target Relevant Credit Opportunities: When applying for credit opportunities, you should only apply for those you are likely to be approved based on your credit score. It can reduce the risk of multiple hard inquiries.

Examples of Credit Products and Their Impact on Credit Scores

  • Credit Card: When you apply for a credit card, a hard inquiry will be performed on your credit report. If approved for the credit card, your credit score may initially drop due to the new credit line. 

  • Personal Loan: Applying for a personal loan can also impact your credit score.

  • Mortgage: When you apply for a mortgage, a hard inquiry will be performed on your credit report.

Key Takeaway: When applying for credit opportunities, you should only apply for those you are likely to be approved for based on your credit score to reduce the risk of multiple hard inquiries. Each type of credit product will trigger a hard inquiry on your credit report, impacting your credit score.

If you are affected, here is how to remove hard inquiries.

Credit Mix

The variety of credit accounts you possess also influences your credit score calculation. Responsible management of diverse debt types, such as revolving accounts (e.g., credit cards) and installment loans (e.g., car payments, mortgages), assures lenders of your financial competence.

Understanding the Importance of Different Credit Accounts

Credit mix refers to the variety of different types of credit accounts you have open, such as:

  • Credit cards

  • Installment loans (such as car loans or mortgages)

  • Retail accounts (store credit cards)

  • Personal lines of credit

The Impact on Your Credit Score

A diverse mix of these different types of accounts can positively impact your overall credit score. In addition, lenders like to see that you can responsibly manage multiple forms of debt.

Lenders may not view this favorably if you only have one type of account, such as a single credit card since they need more information about how well you handle other forms of debt.

The Ideal Mix for Optimal Scores

While there is only sometimes an ideal number or ratio for having a good mix, most experts recommend having at least two or three different types to show diversity and financial responsibility.

Avoid Overextending Yourself

While diversifying your portfolio is critical for optimal scores – it’s also essential not to overextend yourself with too many open lines simultaneously.

Too much available credit could lead creditors to believe you’re borrowing more than what’s comfortable for you, ultimately making them less likely to approve future applications due to high-risk factors.

Key Takeaway: Having a good mix of different types of debt can help you have a higher credit score, but it’s important not to overextend yourself and borrow more than you’re comfortable with. It’s essential to balance having enough variety while being mindful of your limitations.

Monitoring Your Multiple Credit Scores

Many people are surprised that they have more than one FICO Score since various companies provide these assessments using slightly different methodologies.

Major reporting agencies Equifax®Experian, and TransUnion® produce unique results based on their respective models and formulas when evaluating consumer data files individually sourced from each credit bureau or directly over specific periods requested for particular purposes.

Understanding the Differences Between Credit Scores

difference between credit scores

Different credit scores may vary due to several reasons, such as:

  • Data discrepancies: The information in your credit report at each of the three bureaus might differ. Inaccuracies or missing data can lead to variations in your score across various reports.

  • Credit scoring model differences: While most lenders use FICO scores, some prefer other models like VantageScore®, which has a slightly different approach to calculating credit scores.

  • Lender-specific preferences: Some lenders customize their scoring models based on their unique risk tolerance levels and customer profiles. As a result, you might receive varying offers from different financial institutions, even with similar overall creditworthiness.


How are credit scores calculated?

Credit scores are calculated using a combination of factors, including payment history (35%), credit utilization (30%), length of credit history (15%), types of accounts (10%), and recent inquiries or new credit applications (10%). Different credit scoring models may weigh these factors differently, but the general principles remain consistent.

How does the credit score algorithm work?

The credit score algorithm analyzes your financial data from your credit report, assigns weights to each factor based on its importance, and calculates a numerical value representing your overall risk as a borrower. Higher scores indicate lower risk and better chances for loan approval with favorable terms.

What factor is 30% of your credit score based on?

Thirty percent of your credit score is based on the amount you owe or ‘credit utilization.’ It refers to the percentage ratio between outstanding balances on revolving lines like credit cards compared to their available limits. Lower credit utilization ratio and rates typically result in higher credit scores.

Like the Cars, Credit Scores Need Maintenance Too

As we’ve learned throughout this post, having a good credit score can open doors to lower interest rates on loans, better credit card rewards, and other financial benefits that can save you money in the long run. Therefore, investing time and effort in maintaining a good credit score is well worth it.

Follow the key takeaways and recommendations in this post to improve your credit score, and you’ll be on your way to achieving long-term financial stability.